December rate hike back on the table?

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Live! It’s Janet Yellen!
Fed Chair Janet Yellen piled onto the crude oil market after telling Congress that a December rate hike was a, “Live possibility!” Live–it’s a December rate hike! Maybe Yellen instead of Donald Trump should be on Saturday Night Live because she seems to get a major reaction to saying “live”!
It sent a shockwave through the markets causing a big spike in the front end of the treasury yield curve and a spike in the dollar. Sure, she says a rate hike is data dependent but that’s not very helpful to oil prices after a slightly disappointing weekly Energy Information Administration supply report.
While refining surged once again, it was not enough to overcome another build in overall crude supply and a smaller than expected drawdown in Cushing, Okla., stocks. The crude oil build came in at 2.8 million barrels from the previous week and was on the high-end of what the market was looking for. In Cushing, supply fell 212,000 barrels, short of the 500K that we saw in the API report.
Now, if it weren’t for Janet Yellen the market may have rebounded as we are seeing green shots of bullishness in the report. We saw refining runs jump to 88.7% of capacity as refiners look to spread out of seasonal maintenance and then took advantage of strong margins.
Demand looks strong as well, as motor gasoline inventories fell by 3.3 million barrels and distillate fuel inventories decreased by 1.3 million barrels. Total commercial petroleum inventories actually decreased by 2.3 million barrels last week. This is because gasoline demand is at an average 9.2 million barrels per day, up by 2.5% from the same period.
Distillate fuel demand is 3.9 million barrels per day over the last four weeks, up by 8.9% from the same period last year. So, if you look past the Fed and the headlines we should see a rebound, assuming the market realizes that Yellen really is not saying anything different. We are data dependent. I think she put December for a potential rate hike back on the table, not because she believes that they will raise rates, but because she does not want the market to price in irrational low rate exuberance forever.
Oil traders were watching with much interest when Maria Bartiromo interviewed ExxonMobil (XOM) CEO Rex Tillerson yesterday on “Mornings with Maria.” The man that just made the Forbes list of the world’s most powerful people gave his outlook for the global oil market. While he painted a weak picture on the economy and jobs, he also sounded like a CEO that was looking for opportunities that would serve his company for the future.
Tillerson said, “If you look at energy for kind of a proxy for how the economy is going, it’s pretty sluggish and there’s not a lot that we can see on the horizon through next year that’s going to change that; the U.S. economy has been ‘sluggish’ since the downturn of 2009. We’ve never really found our legs. We [have] just been kind of sliding along at a very, very modest economic rate.”
In fact he rightly credited U.S. job growth to the shale revolution. “If you look at job growth in the U.S. since about 2010 and 2009 when the shale revolution really began and activity levels really picked up to these very high levels most of the job growth in the United States, if you strip out our industry… there was no job growth in the U.S… As we’ve had the downturn we are seeing significant job losses there and I think that’s why you see it translating into flattening some of the job gains.”
As far as targeting companies to buy in the energy sector he said, “valuations are still a little bit out of line with our view of where they should be in order to make an acquisition attractive to us. We’ll see going forward because there will be a lot of pressure coming on a lot of companies as we enter next year.”
In other words he is watching the energy sector very carefully and when the time is right, Exxon will be ready to pounce.
He is looking at areas that others are giving up on saying that he still sees attractive opportunities in West Africa and Canada. He even said his Canadian Sands plays are doing well even as other companies flee.
Regards All.
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