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If oil doesn’t do this, then watch for a steep fall

By Barbara Kollmeyer

Published: Mar 3, 2016 9:12 a.m. ET


Critical information ahead of the U.S. market’s open

There’s a distinct whiff of optimism in the air where crude prices are concerned — something that has trickled down to stocks.

There was good and bad news in Wednesday’s U.S. crude production data. First the good: Oil production fell for a sixth straight week, and is now at the lowest since Nov. 2014, notes Commerzbank. But the bad: Inventories rose 10.4 million barrels, to a new record high.



Crude’s uphill battle
“The fact that the market is taking such longer-term aspects into account rather than looking solely at near-term inventory trends suggests that sentiment is shifting on the oil market,” says Commerzbank.


Count hedge funds as among those licking their chops and loading up on energy companies, on a bet that happy days will be here soon for oil, reported The Wall Street Journal.

But not so fast, say some. Blackwell Global, in an article for Action Forex, says the recent rally above $30 is “largely a dead-cat bounce. Subsequently, expect crude to challenge the downside in the coming weeks, as the screaming hordes of market pundits stop declaring that crude oil’s bullishness is here to stay.”

Nor is range-bound volatility on crude at its bitter end, says Michael O’Rourke, chief market strategist at JonesTrading. “We suspect that when the level of DOE [Department of Energy] inventories begin to register successive weeks of declines, the bottom is likely in,” he writes.

On to our call of the day, which zeroes in on the next big level for crude. As for stocks, where crude goes matters, as the two seem unable to agree to an amicable de-coupling.

Key market gauges
Futures on the Dow YMH6, -0.07% and the S&P ESH6, -0.14% are down a little, tracking oil prices. WTI crude CLJ6, -1.21% is slipping, and hanging on above $34 a barrel, as investors chew over that inventory data.

In Asia ADOW, +1.43% , it was mostly an up day, with the Nikkei NIK, +1.28% adding 1.3%, but the Hang Seng HSI, -0.31% pulling back. Europe SXXP, -0.39% is meandering lower.

The dollar USDJPY, +0.22% has been tapping ¥114 as equities have been getting bid. Gold GCH6, +0.11% GCH6, +0.11% is barely moving.

The call

The slippery slope
$35 a barrel. That’s the number to watch for U.S. crude prices, says FXTM’s chief market analyst Jameel Ahmad, who explains why it’s so important in a note to clients.

“Make no mistake, $35 is a superior psychological level for the commodity, and if WTI manages to close trading for the day above $35 this opens up the gates for further moves higher in price, with this obviously providing a boost to any exporters of the commodity,” he says.

Oil has been trying to recapture this level for over a month. Ahmad warns that if that doesn’t happen soon, another big move to the downside could be on the way.

“This is exactly what happened in January, when WTI failed to close above $35, with the consequence being another aggressive round of selling that led to the commodity hitting another multiyear low narrowly above $26,” he says.

Earnings
Costco could be active after the warehouse chain posted an 8.7% profit slide. Kroger KR, -6.81% also reports ahead of the bell, followed by H&R Block HRB, -0.34%Hewlett-Packard HPE, -2.05% and Smith & Wesson SWHC, -0.89% after the close.

The buzz
Reuters
The late Chesapeake Energy CEO Aubrey McClendon
The death of Aubrey McClendon, the 56-year-old former chief executive of Chesapeake Energy CHK, +13.24% , is still sending shock waves throughout the industry. Known as the face of the fracking boom, he was killed in a fiery car crash on Wednesday in Oklahoma, after being indicted by a grand jury earlier in the day on antitrust charges. Tributes are pouring in:


Herbalife HLF, -7.43% is down 6% after the nutritional supplements seller said it had overstated new member growth. That’s good news for Bill Ackman.


Hong Kong-based Samsonite 1910, +0.00% is nearing a deal to buy Tumi TUMI, +31.76% in a deal that could value the New Jersey-based luxury luggage maker at nearly $2 billion, sources told The Wall Street Journal. Tumi is up about 35% on that news.

SunEdison SUNE, -12.57% could come under pressure after the solar panel maker suspended quarterly dividend payments on preferred shares.

Apple AAPL, +0.29% has formally objected to a judge’s order that the handset maker help the government unlock a terrorist’s iPhone.

Crowd-sourced estimates provider Estimize is debuting a predictive stock-ranking tool on Thursday. The Forcerank app lets people participate in contests over several sectors.

Donald Trump has released his 7-point health care plan. Point 1: repeal Obamacare.

Moody’s went negative on 38 Chinese state-owned enterprises on Thursday, listing money flows out of the country and uncertainties over economic reforms as concerns. There are big names in there, like China Mobile 0941, -0.23% CITIC 0267, -0.35% and a whole bunch of construction companies.

Smith & Wesson SWHC, -0.89% will report earnings after the close.

The chart
Deflation fears are at an extreme level, says the global asset allocation team at Société Générale in a note Thursday. And there’s a twist.

“One key difference relative to last summer’s riskoff environment is that the recent deflation fear is a story in both emerging and developed countries,” they say.

SocGen uses a range of macroeconomic indicators to model the newsflow that’s pushing either the deflation or inflation story. Right now, oil has been dominating the latest moves. Here’s their chart:


The economy
The countdown is on for Friday’s jobs report. Ahead of that today, weekly jobless claims rose 6,000 to 278,000. Fourth-quarter productivity was revised to show a 2.2% fall, and a rise in labor costs trimmed to 3.3%. The ISM nonmanufacturing survey is coming at 10 a.m. Eastern, alongside factory order data.

The quote
Reuters
BOJ’s Kuroda got grilled over negative rates last month
“If you try to run the global system with the systemically important banks all in negative territory, I can guarantee you that something will break. The system is not built to operate at negative rates throughout the world.” — Mohamed El-Erian, chief economic adviser at Allianz, tells CNBC that sooner or later, negative interest rates are going to be a “major issue.”

The stat
Reuters
Hey buddy, can you spare billions of riyals?
$10 billion — Saudi Arabia is asking the country’s banks for a loan in that ballpark as falling oil prices have hit its budget hard, reports Reuters.

http://www.marketwatch.com/story/if-oil-doesnt-do-this-
then-watch-for-a-fall-2016-03-03