Surprise Cut In Oil Output Sends Crude Prices Higher

Key Takeaways

• Can Stocks Keep Going In Q2?
• Oil Cutbacks Send Prices Higher
• Jobs Numbers All Week

Stocks closed out the end of Q1 with some solid gains as geopolitical fears and inflation concerns gave way to investor enthusiasm. For the quarter, the S&P 500 gained 7%. The Nasdaq Composite was up an impressive 17%. However, the Dow Jones Industrial Average played laggard with a gain of just under 0.5%. This week is filled with various employment reports, with the grandaddy of them all, the Employment Situation, due out Friday. Between that and some volatility in oil, it could be an interesting week.

With the S&P 500 and Nasdaq far outpacing the Dow, many investors have been wondering if and when the Dow might close the performance gap. That answer may be coming soon with a surprise cut in oil output from a group of oil producers, led by Saudi Arabia. The announcement was not from OPEC or the larger OPEC+, making it a somewhat unusual decision. However, the cuts, which will be a little more than a million barrels of oil per day, comes on top of a two million per day cut announced by OPEC+ back in October. In total, that’s about a 3% cut in production in seven months. News of the cutbacks sent crude futures higher by nearly 6% in premarket and oil related stocks such as Exxon Mobil and Chevron
CVX
Corporation are also indicated higher in premarket. That also has the Dow futures trading higher premarket by a little less than 0.5%.

Elsewhere, a report out of Bank of America
BAC
shows fund managers are reducing exposure to U.S. equities. According to the report, U.S. stock holdings are at an eighteen year low as nearly half are currently underweight U.S. equities. This contrasts with what we are seeing at tastytrade as our customers have actually been increasing exposure to individual stocks and expanding beyond the last 6 month trend of primarily indexes and index related ETF’s. However, some of what we are seeing with fund managers could be a result of rising interest rates.

As we exit the TINA (there is no alternative) era, where 0% interest rates essentially forced money into equities, rising interest rates are making fixed income more appealing as a part of portfolio allocation strategies and allow fund managers to reduce risk. Rising interest rates could also begin factoring into the reduced equity exposure in other ways, namely, stock buybacks.

In the past, corporations were able to raise cash by selling bonds and paying virtually nothing in interest. The money raised was then used in share buyback programs. Now, with interest rates at 5% and many expecting another quarter-point hike in May, buybacks may become less appealing. The cost of raising capital means share prices would have to rise above the cost of issuing bonds in order to justify repurchasing programs. Therefore, we may be in for a reduction from this catalyst and it’s certainly something worth watching.

A couple individual stocks I’m watching today are Tesla and McDonalds. Tesla released their 1Q delivery numbers over the weekend. The electric automaker delivered a record 423K cars for the quarter; however, that number missed analyst expectations and the stock is down around 3% in premarket. Shares of McDonalds are up just under 1% premarket. The fast food giant is closing its corporate offices for a couple of days, early this week in advance of layoffs that are expected later in the week.

The big story this week will be jobs. On Tuesday, the JOLTs report will be released and we’ll get a sense of how many unfilled job openings currently exist. Then on Wednesday, the ADP report is due which shows employment based on payroll data. Finally, on Friday, the Employment Situation for March will be released. Currently, expectations are for an unemployment rate of 3.6% with 238K new jobs created.

This week’s jobs report is very interesting because it will be released on a day markets are closed for Good Friday. That could mean we see a lot of activity on Thursday, in advance of Friday’s report. Adding to the unusual situation is that futures markets will be open Friday until 12PM CT. Therefore, futures could see plenty of activity Friday morning while stocks have to wait until Monday to react.

Between the oil cutbacks and jobs data due, this could make for an interesting kickoff to Q2. For today, I’m watching oil. After trading in a 10-point range between $72 and $82 for an extended period of time, oil broke support, trading as low as just over $64/barrel recently. But with the production cuts announced over the weekend, those losses have all been recouped and in premarket, oil is back up near
near
resistance around $82. A break above this level could have an effect on gas prices, inflation and subsequently, what the Fed may do when they meet in May.

If this week doesn’t offer enough activity, next week kicks off a new cycle. Q1 earnings start late next week, beginning in the banking sector. Given what has transpired there in the past month, these first few earnings announcements could prove very interesting. As always, I would stick with your trading plan and long term objectives.

tastytrade, Inc. commentary for educational purposes only.