Rejected!
The Euro tried to get back over $1 yesterday and was soundly rejected and is back to 99 cents this morning and that is popping the Dollar back to 111.50 (yesterday’s high) and sending the indexes back towards yesterday’s lows in pre-market trading and you can read 100 other theories about why the rally is pausing but that’s the boring truth of it.
In the short run, the market will do the opposite of whatever the Dollar does – quite simply because stocks and commodities are priced in Dollars so, to deny that relationship is like denying that changing the denominator will change the outcome of a non-zero equation – you can say it, but you’ll fail your math test.
Yes, OPEC lowered their production quota by 2Mb/day and that makes a great headline but they were already 1.2Mb/d under quota so they’ve only lowered it by an effective 800,000 barrels per day – IF NO ONE CHEATS (and they always do). Meanwhile, in response, Biden released 10Mb from the Strategic Petroleum Reserve – making him the first President to ever actually use it strategically.
That buys us 10 days against OPEC cuts – even if they all comply immediately and that gives US, Canadian and Mexican producers time to ramp up production and, on day 0, Biden, CVX and Venezuela have already agreed to reopen exports to the US (and hold a free election by 2024 – go Joe!) while freeing up frozen funds earmarked for food, medicine and equipment needed to improve the water and electric systems. Those darned Democrats – always trying to do something to help people…
Venezuela was once a major oil producer, pumping more than 3.2 million barrels a day during the 1990s, but the state-run industry has collapsed over the past decade because of underinvestment, corruption and mismanagement. Sanctions leveled by the Trump administration further dented production to 653,000 barrels per day after forcing Western companies out of the country – another reason US oil prices doubled under Trump – he eliminated the competition.
Fortunately, the oil is still there – 300Bn barrels of reserves is more than Saudi Arabia has but Saudi Arabia pumps 11M barrels per day and Venezuela pumps 650,000. Venezuela only has 32M people – less than Saudi Arabia. We could help turn that country into one of the richest in the World (and a reliable energy partner) with very little effort.
This is all good news for CVX, who historically have the best ties in Venezuela and, even at $158, they are only 50% higher than last year but they are making twice as much money ($36Bn) as they did last year. 1M barrels a day out of Venezuela at a $50 profit would make CVX $18Bn more and I’d say they are going to be on that patch over the next two years – so this is a nice buffer against a price decline in oil.
In our Long-Term Portfolio (LTP), we can sell 5 CVX 2025 $130 puts for $16 and that would put us in at net $114 if assigned and it will put $8,000 in our pockets against $4,161 in margin (since it’s way out of the money) so it’s a nice way to keep an eye on them as this situation develops.
Speaking of developing. Fitch cut the UKs credit outlook to Negative – indicating a downgrade may be in their future. The BOE also had their outlook cut, which is very embarrassing for them.
“The large fiscal stimulus, announced without compensatory measures or an independent evaluation of the macroeconomic and public finances’ impact, and the inconsistency between fiscal and monetary policy stance given strong inflationary pressures, have in Fitch’s view, negatively impacted financial markets’ confidence and the credibility of the policy framework,” analysts Erich Arispe Morales and Greg Kiss wrote.
That’s also keeping the Dollar up and we’ll see how the day goes but we’re still oversold and, if our currency will stop fighting us, I think we can still make technical progress as we head into the beginning of earnings season next week.
But first we have to get past today’s PMI and ISM Reports (10 am) and tomorrow’s Non-Farm Payroll Report – where we want LESS jobs, not more to be created. Expectations are for 238,000, down from 315,000 last month but the Fed would like to see something below 200,000.
