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Authored by Alex Kimani via OilPrice.com,

It’s been disheartening for the bulls that oil prices have failed to break out over the past few weeks despite a flurry of positive news including declining inventories and reports that OPEC+  producers have mostly been sticking to their pledged cuts.

And now the pendulum has swung to the opposite end and oil markets have to climb a new wall of worry.

After a brief, half-hearted rally, oil prices have dropped back to a familiar trading range in the low-$40s after the Labor Department reported that U.S. weekly jobless claims totaled 1.106 million last week. This comes just a week after the tally dipped below the 1M mark for the first time since March, thus raising serious doubts about the sustainability of the economic recovery.

“With all the bullish headlines that we’ve seen over the last weeks regarding inventories, the inability to break higher does not bode well,’’ Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors LLC, has told Bloomberg. 

“Crude fails to break to the upside and you’re in a contango market, so risk is to the downside.”

Oil price volatility has returned to pre-crisis levels and nothing seems to jolt the markets into action at this point.

Source: Bloomberg

Here are 3 reasons why oil prices might remain in limbo for much longer than the bulls could have hoped for.

#1. Another Supply Glut

A huge supply glut and lack of storage space is the biggest reason why oil prices sunk into negative territory in April for the first time ever. Thankfully, the situation is much better now than it was four months ago, which is the reason why oil prices have staged a nice recovery.

But here’s the alarming part: Although U.S. oil inventories have been declining over the past couple of weeks, the margin of drawdown has shrunk considerably.

According to EIA data, U.S. oil inventories declined by 10.6 million barrels during the week ending July 24 and then dropped by 7.4 million barrels, 4.5 million barrels, and just 1.6 million barrels in the three subsequent weeks, respectively. There’s a real danger that this trend could soon flip and inventories could start rising again – a very negative development for oil prices.

These inventory worries are not helped by the fact they have come at a time when OPEC+ has eased its deep production cuts. Starting this month, OPEC trimmed its historic production curbs by about 2 million barrels per day to 7.7 mb/d. But as BNP Paribas’ head of commodity strategy Harry Tchilingurian has told Bloomberg, there are genuine concerns that rising OPEC+ production could coincide with an uneven recovery in oil demand.

Rystad Energy has also warned that a renewed surplus could come knocking again following the loosening of the OPEC+ production cuts:

“OPEC’s experiment to increase production from August could backfire as we are still nowhere near out of the woods yet in terms of oil demand. The overall liquids market will flip back into a mini-supply glut and a swing into deficit will not happen again until December 2020.”

Saudi Arabian Energy Minister Prince Abdulaziz bin Salman tried to assuage fears that the easing had come too soon by pointing out that countries that had failed to stick to their pledges in May and June would compensate by cutting production in the coming months. But we all know that with OPEC+, nothing is ever guaranteed.

#2. Covid-19 uncertainty

Much of the recent oil and equity rallies can be chalked up to optimism that a Covid-19 vaccine will soon become a reality. Indeed, the race to develop an effective vaccine is in full swing: Globally, there are 185 research teams engaged in the race to find a vaccine with seven vaccines having made it to the final stage of large-scale efficacy trials.

Unfortunately, proper vaccine development is normally a very long process with safety usually given top priority. For instance, a recent vaccine for dengue fever was discovered to actually heighten the disease in vaccinated children when they later were exposed to the dengue virus while another vaccine developed for Respiratory Syncytial Virus caused the same problem. It’s the biggest reason why many countries are discounting Russia’s so-called ‘Sputnik moment.’

With no clear timelines as to when a viable and safe vaccine could hit the mass markets, the global economy and oil markets remain particularly vulnerable to the so-called second wave of Covid-19 infections. Indeed, last month OPEC+ expressed concern that the pace of the oil market recovery has been slower than anticipated due to the growing risks of a prolonged second wave of the pandemic.

#3. The renewables boom

When investors think of the oil-renewables nexus, they usually look at it in terms of how low oil prices might slow down the shift to renewable energy. Whereas that is true in principle, so far there is no evidence that low oil prices have negatively affected the momentum of renewable energy. On the contrary, the demand for renewable energy has continued to grow during the pandemic at a time when fossil fuels are facing their biggest demand destruction in history.

The ongoing wave of massive asset writedowns in the oil and gas sector is a clear indication that executives have finally acknowledged that ‘Lower Forever’ might be the new norm for oil as Shell CEO predicted three years ago.

The bulls might have the last laugh though: Sustained underinvestment in oil projects might actually lead to a supply squeeze down the line which could cause oil prices to spike.

Earlier this year, Morgan Stanley’s Michael Wilson was the first sellside strategist to turn aggressively bullish on the market, after correctly holding on to a contrarian bearish bet for the prior year, expecting that the flood of central bank liquidity and incipient reflation would push stocks to all time highs. Not long after, one by one his Wall Steet peers jumped onboard the bullish train which earlier today hit a new all time high when the S&P rose above 3,400 for the first time, printing at 3,425.

Which is why we read with interest Wilson’s Monday Morning note, in which the strategist who has demonstrated an uncanny ability to spot market inflection points warned that the collapsing market breadth is becoming a major concern for the market, and that while an entire market defined by just one stock – Apple – won’t derail the new bull market “we do think it’s a precursor to the first tradable correction, which could begin imminently.”

We bold the last word in that quote because it reminds us of what we published just yesterday, when we said that “Horrendous” Market Breadth “Stinks To High Heaven”, Screams Imminent Risk-Off” and incidentally those who read our article won’t find much new in the guts of Wilson’s latest note.

Echoing what we said, the Morgan Stanley strategist writes that “breadth continues to narrow with Friday’s price action perhaps the most extreme example yet. Just one stock, Apple, contributed 105% of the total return of the Nasdaq 100 and S&P 500 and 88% of the total return of the Dow Jones Industrial Average. For the week, the S&P 500 traded higher by 72bps to a new all-time high while the equalweighted S&P 500 traded down -1.5% and remains almost 8 percent below its all-time high back in February.” This, readers may recall, is taken directly from chart which we posted on Sunday, which showed the divergence between the equal-weighted S&P and the normal, cap-weighted index:

Continuing on this theme, Wilson next notes that the equal-weighted S&P is “also still below its June 8th high, which is when the % of stocks making 52-week highs peaked. Finally, the cumulative advance/decline line for the S&P 500 peaked on August 12th, failing to confirm the new all-time highs.”

Of course, for those watching the ever growing concentration of just a handful of stocks, this is not news…

… and in fact, as Wilson writes, “this narrowness in breadth has been one of the most discussed features of this rally. What’s interesting to us is the fact that breadth showed a dramatic improvement in the first several months of the rally from the March lows and was one of the factors that helped us declare a new bull market early on. It’s only been more recently that narrow breadth has become a potential concern in our view.”

To Wilson, the “bottom line” is that while he still remains overall bullish and still thinks we are at the beginning of a new cyclical bull market, “the recent extreme narrowness suggests that we are now ripe for the first meaningful/tradable correction. The question is—what will cause it?”

To Wilson, last week saw several developments which could have an overall negative impact on equity markets in the short term:

• First, several universities have decided to backtrack on in-person learning due to COVID outbreaks as students returned to  campus. Unsurprisingly, other schools followed with decisions to move fully online rather than risk outbreaks of their own: “this is a negative development with respect to our reopening narrative since we first highlighted it back in mid-April.”
• Second, in addition to the heightened concerns from schools moving online, Congress remains gridlocked over the next round of fiscal stimulus. Without it, Wilson thinks “the recovery will almost assuredly roll over, which is why we think there is little chance Congress will fail to execute, especially in an election year. However, that doesn’t mean we won’t see some moments of doubt and uncertainty about the size and timing of the next package reflected in the market. Every day that goes by, households dependent on unemployment benefits will likely lose confidence in their own finances.” Just this past week we heard commentary from several retailers (WMT, TJX, KSS, and FL) suggesting they have begun to see a slowdown in spending. Some of this is likely attributable to the suspension of these benefits along with the fact that demand for certain spending categories was pulled forward in 2Q when much of the economy was locked down. The chart below from Goldman shows just how steep the drop in UI payments has been. 

• Third, Morgan Stanley notes that the heavily anticipated minutes from the Fed’s July meeting did not provide the hand holding that investors were expecting on future Fed policies. More specifically, “guidance on average inflation targeting (AIT) and yield curve control (YCC) were primary sources of the disappointment” which is a concern since “a good part of the bullish view on long-term interest rates, both nominal and especially real rates, is based on the Fed doing both.” Last week’s minutes suggested to Wilson the Fed is either not ready to, in the case of AIT, or don’t have much interest in it at all (YCC). Treasury bonds sold off after the release, followed by a very poor TIPS auction the next day. But neither nominal nor real rates have shown any real follow through: “truth be told, a 10-year Treasury yield at 64bps that leave real rates at -100bps is hardly troubling, in our opinion, for those worried about a non-linear move higher that could be disorderly to financial asset prices.”

So, as Wilson asks, “what’s going on?”

His answer is that the inability of rates to move meaningfully higher is directly related to the hold-up on fiscal policy and growing concerns about schools reopening, and staying open. Meanwhile, the dismal breadth shows that stocks have traded soft under the surface of the headline indices, “which are now being driven by just one stock—Apple.”

Ultimately, Wilson warns that a growth scare “should even start to weigh on Apple just as it’s weighed on reopening beneficiaries and some of the COVID leaders more recently.” Which, however, is good news, because if and when that happens, “Congress would be quick to act and potentially come through with a bigger stimulus than what is currently expected—i.e. $2.0-$2.5 trillion” leading to even more debt issuance from the Treasury, even more QE from the Treasury’s “helicopter money” tag team partner, the Fed, and even higher risk prices. An upside surprise combined with this week’s disappointing Fed minutes with respect to YCC is all that would be needed for a sharp move higher in back end rates, Wilson adds.

Morgan Stanley’s conclusion: “we expect a growth scare to be followed by a rate scare over the next several weeks/months that could finally give us that first tradable correction in the major US equity indices”, one which as he noted earlier, could begin imminently.

Judging by Apple’s stark intraday reversal when the stock sprinted to a new all time high of $515 out of the gate on some bullish whispers from – ironically enough from Morgan Stanley of all banks – only to turn red, we wonder if Wilson didn’t time the latest market inflection point to the day.

Well that escalated quickly…

AAPL is back below $500…

TSLA is back below $2000…

And Nasdaq is now red for the day after being up over 1.4% at the open…

Is the market finally waking up to the total lack of breadth?

The German hospital where Russian opposition leader Alexei Navalny is being treated has announced that the politician and investigative journalist was probably poisoned with a “cholinesterase inhibitor,” though the exact nature of the poison isn’t known.

Tests on Navalny indicate that the Russian anti-corruption campaigner was indeed poisoned, and a “broad analysis” has been launched to try and determine the exact nature of the poison.

Doctors at Charite-Universitatsmedizin Berlin, where Navalny has been treated since being transferred from Siberia on Saturday, said his “clinical findings indicate intoxication by a substance from the cholinesterase inhibitor group.”

“The specific substance has not been identified so far and a further wide-ranging analysis has been initiated. The effect of the toxin, i.e. the cholinesterase inhibition in the organism, has been proven several times and in independent laboratories.”

They said Navalny remains in an artificial coma and is in a serious condition “but there is currently no acute danger to his life.”

Navalny is reportedly in serious, but stable condition, according to a statement Monday from Berlin’s Charite hospital. He was evacuated from Russia on Saturday.

He has been in an artificial coma since Thursday after falling ill on a plane returning to Moscow from Tomsk. Read the full statement below.

Statement by @ChariteBerlin on @navalny.
/ht @RebHarms pic.twitter.com/wdMRJuS89W

— Yannis Koutsomitis (@YanniKouts) August 24, 2020

The 44-year-old was in the city meeting local activists and opposition candidates ahead of regional elections set for September. His sudden illness raised suspicions after a string of Kremlin critics fell victim to poisoning in recent years.

According to Sky News, Navalny is being treated with atropine but the doctors said they cannot currently determine whether he will have lasting issues, “especially in the area of the nervous system.”

By Michael Every of Rabobank

Fathers and Sons. Full Stop/Period

Turgenev’s ‘Fathers and Sons’ came to mind this morning; and you know it’s not going to be a tiding of joy when Russian literature is your first reference point as you read the news. Why Turgenev? Because it is being reported that Generation Z are apparently unhappy with the full stop. Period. (NB, I will use ‘full stop’ from now, being British.) Apparently this simple yet essential grammatical device, used to separate one’s written thoughts, is seen as being “too aggressive”. That’s right. Too aggressive. Presumably, a flood of thoughts with no method of grammatical segmentation is passively preferable; or a sequence of very short thoughts that don’t require clarification with commas, colons, semicolons, or hyphens – because why should they survive?

Cherish that 19th century literature. Because we won’t be seeing its like again on this kind of trend. Luckily we can still just about squeeze in Wittgenstein’s “The limits of my language are the limits of my world” into a Tweet, without a full stop, and still grasp the enormity of this inexorable linguistic entropy taking place. A thought which will itself soon just be a picture of Wittgenstein and a sad face emoticon, presumably :L

The irony, of course, is that Turgenev speaks perfectly to this generational disconnect, and to a foreboding sense of social entropy, albeit his book was published nearly half a century before the Bolsheviks ultimately seized power. Genteel petty-bourgeoisie Nikolay Kirsanov, who thinks himself a social liberal, is totally unable to understand his son Arkady after he returns home a graduate from St Petersburg a disaffected nihilist. “The fact is that previously they were simply dunces and now they’ve suddenly become nihilists,” states the confused older generation who want to talk about much-needed social reforms; and “What’s important is that twice two is four and all the rest’s nonsense” – which is something still being argued today in some circles. Arkady is happy to use full stops though, even if his replies are the 19th century equivalent of “Ok, Boomer”.

Look at the increasing political polarisation and social disconnect we are experiencing in the West, both horizontally (left-right, with the centre collapsing), and vertically (old-young, with the old moving right and the young running left). This is clear in the results from the last few UK elections as well as the Brexit vote, and in the US in Millennial attitudes vs. those of the Boomers.

Equally, look at our crumbling global architecture and stability. India and China are both digging in at their border; we have Taiwan and the South China Sea – with the Wall Street Journal alleging China is prepared to offer its Covid vaccine to those who will accept its claim to the latter; Iran, where the US is going to proceed with snapback sanctions – in isolation; Turkey, who announced a moderate-sized gas find on Friday, said it will continue to drill in waters claimed by the EU, and is apparently ordering another set of controversial S-400 Russian anti-aircraft missiles that are a red flag to the US and NATO; Ukraine, which rumbles on; and now Belarus and a potential changing of the guard there. Plus, reports -again – that Kim Jong-Un of North Korea is dead and is to be replaced by his sister, opening up unpredictable futures in another potential Asian flashpoint.

Meanwhile, of course, US-China relations continue to deteriorate. In the last few days we have seen two new bills proposed: one will not allow Xi Jinping to be called ‘president’ in any US government documentation, using his title of ‘Party Chairman’ instead – which is arguably accurate when one looks at his Chinese language title, but which also underlines the increasingly-stark systemic differences between the US and China; the second is a claim that China must repay USD1.6 trillion in pre-1949 government debt it defaulted on after the revolution. Neither sound like détente; and neither does President Trump, whose Republican National Convention will be ultra-hawkish on China this week, talking about decoupling the two countries in a Fox TV interview. Indeed, the South China Morning Post today asks “Is Donald Trump bluffing about starting a financial war with China? Chinese officials aren’t so sure.”

You wouldn’t know it from looking at stock markets (in the green across the board again in Asia this morning), but there is a real Turgenev-esque entropy, not negentropy – things being more and more in order – all around us.

Perhaps failure to see that is demographic. Try being young and/or working class or self-employed at the moment rather than middle-aged and middle-class and working from home in the country. Perhaps it’s geographic, which intersects to a large degree: much of the media virus focus is on the West (“My European holiday was simply ruined!”) rather than on the struggles of emerging markets. At the very least it’s sharply hierarchical: if you are getting that sweet, sweet flow of government/central-bank money, you don’t feel much pain right now. How much nicer it would be if we could all see things how others do. As Turgenev says:

“A man is capable of understanding everything – how the ether vibrates and what happens on the sun. But to understand how another man can blow his nose differently from the way he blows his own is something beyond his capability.”

Yet entropy is out there all the same. Even if we beat Covid-19 through a combination of new therapies, another of which Trump just green-lit, or even a vaccine, Russian, Chinese, American, or whatever, does anyone think we are going to go back to business as normal as if no new similar global shock could ever reoccur? Possibly. We have desperately short memories – and on purpose, some might argue. Hardly anybody remembers Turgenev banging on about two times two, or Orwell and two plus two. And neither were the first to say it.

Yet entropy is still accelerating. Indeed, as our global problems become ever more complex and inter-connected, and reach tipping points, the language we have to try to describe, let alone solve them, becomes less and less granular. Bigger problems, fewer words – and no full stops.

For now, the prudent case is to assume that the can-kicking fiscal and monetary policies we have recently pursued will linger – much as finance ministers try to argue it is already time to try to put fiscal genies back in bottles. So the Nikolays of the world will get richer, and the Arkadys will get even angrier. Perhaps they will even shift to ALL CAPS. As the nihilists in ‘Fathers and Sons’ cry: “I want everything or nothing. A life for a life, taking one and giving up another without hesitation and beyond recall. Or else better have nothing!”

Personally, I conclude with this:

“Whereas I think: I’m lying here in a haystack… The tiny space I occupy is so infinitesimal in comparison with the rest of space, which I don’t occupy and which has no relation to me. And the period of time in which I’m fated to live is so insignificant beside the eternity in which I haven’t existed and won’t exist… And yet in this atom, this mathematical point, blood is circulating, a brain is working, desiring something… What chaos! What a farce!”

And now back to Bloomberg…