September 26, 2024 | WTI Crude Down Over US$1/b On Concerns About China Demand

Weak US and China economic data continue to be the focus of investors. Central Banks in each country have lowered interest rates and in China’s case lowered banks reserve requirements so they can lend more and support companies in need of credit to keep from failing. The urgency of both Central Banks to stimulate their economies is due to concerns about unemployment picking up materially and that strike action (for example US east coast port dockworkers) would disrupt supply channels. With a close election battle in the US, the markets are likely to gyrate as each poll comes out and as the policies of both parties face scrutiny. Our view remains that the US stock market is overvalued and any significant negative economic, military or political news could drive the Dow Jones Industrial’s Index down quickly to the 36,000 level from 42,012 today.

Regarding energy, our WTI price target of US$66-69/b was reached two weeks ago. This triggered one of our BUY signals and we sent out on September 10th, an SER Action BUY Alert on five companies from our Coverage List. We also reiterated BUYS on three names already on the Recommended List which had fallen to bargain levels. We expect a period of backing and filling for WTI crude in the coming weeks. A test of the recent lows (US$66-68/b) is now expected and if this occurs we should see one of our other two BUY signals triggered. We plan to add additional BUY ideas at that time. Subscribers please watch your emails on weak market days as this is when such an Action Alert would be issued. Today WTI is at US$70.48/b.

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Some of the recent global economic data points to consider are:

For The US:

• US truckload activity has slowed materially and some trucking companies have already filed for bankruptcy protection. Shipping rates are declining as operators grab what business they can. Independent operators who own their own trucks are the most desperate as they struggle to make the payments on their equipment.
• The looming US east coast port strike could commence 36 days before the election. There are 45,000 dock workers at the ports and these ports account for 60% of US shipping traffic.
• US September Consumer Confidence slid to 98.7 from 105.6 in August, the biggest decline in nearly three years.  The main concerns were about jobs and inflation.
• The US Purchasing Managers Survey (PMI) dropped to 47.0 (previous reading 47.9). Anything below 50.0 is contractionary.
• US M2 Money Supply has gone negative year over year. This is the first time this has happened in many decades. Less liquidity is a tightening of the economy.

For China

• China’s Central Bank made a number of aggressive moves to wake up the dormant Chinese economy. The country faces a popping property bubble with many developers collapsing, low consumer demand and a risk of deflation. It needs to build a consumer economy like other mature economies (US, Japan, UK etc.).
• Its two biggest moves were to lower its required reserve ratios for banks and cut its interest rates. It also lowered down payments on mortgages to stimulate more buying of the excess inventory. It also announced a BUY program for Chinese equities to prop up the stock market.
• China’s main problem is excessive leverage for investments and a lot of malinvestments. Significant write-offs will be needed to clean up this mess and so far this has not occurred sufficiently.

Some of the recent global conflict data points to consider are:

• Hezbollah has fired more accurate missiles farther south into Israel than ever before. Yesterday they fired missiles into Tel Aviv. Haifa with its large Israeli naval base has been hit repeatedly.
• Israel in retaliation has dropped larger bombs to destroy Hezbollah munitions and command and control centers.
• The US and other countries have warned their citizens to leave the country quickly as they fear an all out war is imminent.
• Ukraine has used more accurate missiles delivered by NATO members to hit the large Russian ammo storage depots deep inside Russia. One of these was close to Moscow.
• Ukraine also fired a drone at a facility that houses some of Russia’s newest sophisticated nuclear missiles factories. This could have become a very catastrophic event. It seems that Ukraine and NATO want to see Russia escalate the war so that this forces the next US administration to stay the course. If Trump were to win this would not be the case.

Market Update:  We are watching the economic data carefully as it appears that consumers are tapped out and this seems to be dragging economies around the world into recession. The offset for the US is the US$2T of deficit spending with large war spending that are keeping some areas of the US, with hot economies. The military industrial complex and areas where weaponry is built are strong economic centers these days.

Josef Schachter September 26th, 2024

Posted In: Schachter's Eye On Energy

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