Oil tumbles as inventories are on the rise
Fiona Cincotta February 8, 2017 2:35 PM
<p>The previous session was a mixed bag for equities across the globe. The Dow Jones and the Nasdaq both hit record highs in early trading […]</p>
The previous session was a mixed bag for equities across the globe. The Dow Jones and the Nasdaq both hit record highs in early trading before pulling back due to weaker energy prices. In Europe, the FTSE and the Dax pushed higher whilst the French CaC stumbled as concerns over the Presidential race ensured the bears dominated.
Oil inventories rise as US shale firms return to the game
Oil prices will remain in focus after falling sharply during the Asian session, following API crude inventory data showing that inventories soared to a shocking 14.2m, significantly higher than the 2.5m expected and one of the biggest inventory gains in history.
This vast increase in inventories is a result of a strong supply response from the US shale producers, who were not involved in the OPEC agreement and who have instead been using the resultant price rally to increase output. Until now OPEC was monopolising the market’s attention and there was plenty of optimism surrounding the OPEC cuts, no one really expected the US shale business to react so quickly. US shale companies have switched output back on as the price of oil has moved through their breakeven point and as a result have adjusted the supply demand dynamic, quickly becoming a very severe headache for OPEC.
Attention will now move to today’s Cushing crude oil inventories and if they too show similar signs of strength, any hopes of oil hitting $60 a barrel will slip away.
Given the heavy weighting of the energy sector on the FTSE, the blue- chip index is struggling in early trading.
Rio Tinto’s big give back
Rio Tinto has both impressed and surprised investors by announcing that they will pay a much higher dividend than expected and a buy-back of $500 million of shares, after the world’s second biggest mining company reported the first gain in annual profits since 2013.
This is a big surprise when put in context of what the firm and the industry as a whole, have been through in recent years. The new dividend policy is to return between 40% – 60% of earnings and today’s figure is at the top end of this; therefore, the signal from Rio is that they are trying to give back as much as they can to investors.
Could we expect more returns like this going forward? The price of iron ore has doubled from $40 to $80 and given that 75% of Rio’s earnings come from iron ore, they are reaping the benefits. The management here clearly believe in the sustainability of the price of iron ore and believe in the Chinese stimulus programme to underpin that price despite the huge inventories held by China, the world’s largest consumer of metals.
Miner Anglo American also recently reported its first profit in 5 years -this could well be a new era for the miners.
Sterling to stay above $1.2500?
Not many sessions pass without Brexit hitting the headlines in one way or another and today one of highlights will be the UK Brexit bill vote as the bill goes through its third and final reading. This will pave the way for the PM to trigger Article 50 by March 7 her preferred date. We are not expecting any big surprises here so no large price swings are on the cards.
Instead, attention will turn to more BoE commentary due shortly before US market open. After yesterday’s hawkish comments by BoE Kristin Forbes, which sent sterling back up towards 1.2545 before it pulled back to current levels of 1.2500; the bulls will be watching intently for anymore hints along those lines to put fresh legs on the rally.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.