The Overnight Report: Oil Shock

This story features BEACH ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: BPT

The company is included in ASX200, ASX300 and ALL-ORDS

World Overnight
SPI Overnight	7027.00	0.00	0.00%
S&P ASX 200	7038.60	– 72.20	– 1.02%
S&P500	4201.09	– 127.78	– 2.95%
Nasdaq Comp	12830.96	– 482.48	– 3.62%
DJIA	32817.38	– 797.42	– 2.37%
S&P500 VIX	36.45	+ 4.47	13.98%
US 10-year yield	1.75	+ 0.03	1.57%
USD Index	99.18	+ 0.53	0.54%
FTSE100	6959.48	– 27.66	– 0.40%
DAX30	12834.65	– 259.89	– 1.98%

By Greg Peel

One Trick Pony

The ASX200 opened up 22 points yesterday as the futures had suggested and in the face of a swathe of ex-dividends. But it only lasted ten minutes. By 1pm the index was down -100.

There was a slight recovery in the afternoon but by the close, several sectors had been largely trashed. The trouble started when oil prices started to go through the roof, and US index futures started to tank.

At one point, WTI crude traded at US$130/bbl and Brent almost US$140/bbl, up from US$115 and US$118 before the ASX open. Those prices fell back quite a way thereafter to be up 3-4% over 24 hours but sentiment-wise, the damage had been done.

The US and allies are now seriously talking about banning Russian oil exports. More on that below.

The result was a 5.3% gain for Australia’s energy sector yesterday amidst a sea of red. Woodside Petroleum ((WPL)) led the index with a 9.5% gain, while Beach Energy ((BPT)) chimed in with 6.3%. Santos ((STO)) failed to make the top five with 5.4%.

The remaining top five spots were made up by two gold miners and IGO ((IGO)), a nickel miner (with lithium aspirations). The nickel price jumped 50% on the LME last night.

I’m not kidding.

Funnily enough, the materials sector managed only a 1.0% gain yesterday despite solid base metal moves overnight, and only a slight dip for iron ore. Iron ore has since risen 7%. Russia is the world’s fifth largest producer of iron ore.

Beijing has been quiet this time around as the iron ore price hit US$150/t once more, unable to come up with an excuse. Presumably China could now turn to Russia for greater supply (not sure of its purity though).

Similarly, it is suggested Russia can up its sales of oil to China, at knock-down prices. The two have signed a long term gas pipeline supply deal but the pipeline is not built yet. China does buy LNG from Russia.

The point is Putin does have mates.

Utilities (-0.2%) outperformed yesterday on the oil connection while staples (-0.5%) held up on defensiveness. You’ve no doubt noted that prices on the shelf were already surging even before the floods.

Technology was the worst performer (-4.7%) with Block ((SQ2)) falling -10.2%. Boring.

Healthcare lost -3.3% but that included CSL ((CSL)) going ex-dividend. Discretionary dropped -2.5% with everything travel being trashed again, including Qantas ((QAN)), which fell -7.9% to take industrials down -2.7%.

Financials fell -1.6%. The rain is still falling.

The good news, if any, is that Wall Street has tanked overnight but it was following, not leading, hence our futures are absolutely “unch” this morning.

Between oil and a hard place

In the weird and wonderful world that is US law, either the White House or Congress can move to ban Russian oil imports, albeit in the latter case the president still has to sign off on any bill. Biden is on the horns, having pledged to bring US gasoline prices down while at the same time, in a rare showing of bipartisan support, Congress is moving to a Russian ban.

The dilemma in Europe is even greater. It’s all very well for the US, where domestic natural gas is trading at US$5mmbtu. In Europe it’s US$100, with LNG a lot more costly than piped gas.

The pipelines are still open from Russia, but bank sanctions are preventing most trade, and some European companies are going it alone with their own bans.

The moral dilemma. Germany remains hesitant on a full ban, being the most heavily reliant on Russian energy. If Germany folds, the expectation is crude prices could exceed US$150/bbl.

Whatever the case, Wall Street is not waiting to find out. Oil prices pulled back sharply from their highs last night but that did not prevent US indices from closing on their lows. Energy and utilities were the only two positive sectors. Everything else was trashed.

Discretionary was the worst performer (-4.8%) as the oil price scare hit everything from travel stocks to consumers’ pockets.

The financials sector fell -3.7%. The US ten-year yield rose 3 points last night but a larger move in the two-year has that spread now down to only 20 basis points, from 60 points a month ago. If the spread turns negative, it signals expectations of a recession.

Oil shocks and recessions do have a history of going hand in hand.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1992.90	+ 20.00	1.01%
Silver (oz)	25.52	– 0.21	– 0.82%
Copper (lb)	4.71	– 0.11	– 2.24%
Aluminium (lb)	1.73	– 0.05	– 2.82%
Lead (lb)	1.11	– 0.00	– 0.15%
Nickel (lb)	20.50	+ 7.37	56.13%
Zinc (lb)	1.87	+ 0.03	1.88%
West Texas Crude	119.33	+ 3.65	3.16%
Brent Crude	123.00	+ 4.89	4.14%
Iron Ore (t)	162.75	+ 10.35	6.79%

It’s very frustrating when an overnight price move looks so obviously wrong it could only imply some technical glitch. But a quick check of another source and yes, nickel jumped 56%, to mark one of the biggest moves ever seen on the LME.

Short squeeze, and no inventory to speak of.

Other base metals initially followed nickel, but slipped back thereafter. If commodity funds were taking the nickel move on board, and oil, they would have to sell other commodities to rebalance.

Wheat, by the way, is up 100% in a year, 70% in two months and 50% in six sessions. Bad luck if you tried to jump into US wheat futures, they’ve been limit-up six sessions in a row (ie trade halted).

The US ten-year rose slightly last night, the US dollar index jumped 0.5%, yet gold traded above US$2000/oz for a time.

Having shot up on Friday despite the greenback, last night the Aussie looked more normal on the maths in falling back -0.6% to US$0.7320.

Today

The SPI Overnight closed unchanged.

The NAB business confidence survey is out today.

Several stocks go ex-dividend, but none of them are mega-caps.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AIA	Auckland International Airport	Upgrade to Outperform from Neutral	Credit Suisse
Z1P	Zip Co	Downgrade to Sell from Neutral	UBS

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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