Energy’s biggest gainers after Fed rate cut

U.S. stock and energy markets gave up some of their big gains on Friday after the Federal Reserve announced its first rate cut in four years. The US central bank announced a cut of half a percentage point more than usual, with Fed Chairman Jerome Powell managing to thread the needle to suggest that the deeper-than-usual cut was merely a “recalibration” of policy and not a significant movement. to prevent a recession. The large-scale rally saw S&P 500 jump 2.0%; the tech-heavy one Nasdaq Composite gained 2.9%, the Dow Jones Industrial Average increased by 1.48% while Russell 2000 Index added 2.2%. Meanwhile, the oil and gas benchmark, Energy Select Sector SPDR Fund (NYSEARCA:XLE) gained 2.1% on the day, as the recent rally in oil prices kept the momentum going.

Oil prices are on track for their biggest weekly advance since February after a sharp interest rate cut by the Federal Reservewhile traders continued to monitor tensions in the Middle East. Brent crude for November delivery traded at $74.76 a barrel in intraday trading on Friday at 1:15 p.m. ET, up from $71.80 a week ago, while West Texas Intermediate for October delivery changes hands at $72.35/barrel from $68.84. The rally in oil prices started a week ago due to the largely unwarranted extreme bearishness of money managers.

Over the past two weeks, oil markets have been buffeted by a storm of top-down macroeconomic fears that have fueled momentum-tracking algorithms, resulting in a prolonged decline in oil prices, exacerbated by a final stage of range-hedging to the banks. Overwhelming discounting among money managers has driven positioning in crude oil and petroleum products to its worst extreme since the start of the global financial crisis (GFC) in 2008. commodity analysts at Standard Chartered predicted that the extreme tilt skewed oil price risks to the upside, pointing out that the extremes of speculative positioning warrant a larger short-covering rally.

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“The market concluded that a level below $70, combined with hedge funds holding record low faith in higher crude oil and fuel prices, would require justification for a recession, a risk like last week’s sharp U.S. interest rate cut this contributed to the reduction.” said Ole Hansen, Head of Commodity Strategy at Saxo Bank.

In the energy sector, electric vehicle manufacturer Tesla Inc. (NASDAQ:TSLA) posted the biggest gain, up 7.3%, with lower interest rates likely to benefit auto stocks as it makes auto financing more affordable, easing the need for companies to cut prices and boosting demand. Increased competition, mainly from Chinese electric vehicle manufacturers, has eroded profits and margins for Tesla, despite sales volumes remaining healthy. On July 23, the electric vehicle giant reported that Q2 earnings fell 43% to 52 cents per share. Meanwhile, quarterly revenue totaled $25.5 billion, up 2% from the previous quarter.

Meanwhile, stocks of Big Oil companies also enjoyed a boost following the big rate cut: Exxon Mobil Corp. (NYSE:XOM) +2.4%, Chevron Corp.(NYSE:CVX) +1.7%, Marathon oil (NYSE:MRO) +1.7%, Shell Plc (NYSE:SHEL)+ 1.5% and BP Plc (NYSE:BP)+2.3%.

Interest rate cuts typically boost economic activity and energy demand. However, Wall Street warns that this could take longer to materialize given the current global macroeconomic weakness,

“Cuts in US interest rates supported risk-on sentiment, weakened the dollar and supported crude oil this week. However, it takes time for rate cuts to support economic activity and increased oil demand”, said Giovanni Staunovo, analyst at UBS.

The medium-term oil price outlook remains healthy, with StanChart predicting an oil supply shortage in the coming months. September is shaping up to be the toughest month of the year due to seasonal strength in demand and supply disruptions in Libya as well as the US Gulf. StanChart predicted that Libyan oil may take longer than expected to return to markets. According to analysts, the nuances of the recent negotiations were significantly more complicated than market commentary had suggested. Little substantive progress has been made after two rounds of negotiations, experts report Libyan crude oil exports recorded a speed of 550 kb/d, about half the pre-crisis level of about 1.2 million barrels per day (mb/d). StanChart sees the output cut taking much longer than the market currently expects, suggesting the market has gotten ahead of itself in pricing in the immediate resolution of a de facto unresolved crisis.

Moreover, Russia, Iraq and Kazakhstan have submitted their compensation plans to the OPEC Secretariat for overproduced crude volumes in the first six months of 2024. StanChart determined that adding the compensation program to the recently announced reduction in targets due to the delay in the implementation of the step reduction will result in an OPEC production score of 530 kb/d lower in Q4-2024; 540 kb/d lower in Q1 and Q2-2025 and 560 kb/d lower in Q3-2025 if all commitments are kept.

By Alex Kimani for Oilprice.com

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