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Goldman Sees More Oil Weakness Until China Reopens, Then Even More Upside

Goldman Sees More Oil Weakness Until China Reopens, Then Even More Upside

Now that today’s flagrant oil market manipulation attempt via a…

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11 months ago

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Goldman Sees More Oil Weakness Until China Reopens, Then Even More Upside

Now that today's flagrant oil market manipulation attempt via a WSJ "leak" early this illiquid morning has crashed and burned with oil trading at session highs after a rollercoaster session that saw oil tumble by $5 and then rebound by even more...

... after the Saudis denied the report attributed to the "group’s delegates" just two hours later as we expected...

... we can focus on the bigger picture, which is mostly dependent on China's reopening schedule and the G7 Russian oil price cap - especially with Russia saying it won't sell oil to price-cap nations, a scenario which JPM said could lead to $300+ barrel of oil - and to a lesser extent, the calendar. Here, while the medium-term price trajectory remains somewhat murky, one thing is certain: with even less investment in supply (and with interest rates at levels that make mockery of capex hurdle rates) now than in recent years, over the long-run, prices are going much higher.

That in a nutshell is the summary from the latest Goldman Oil price research note, in which the bank's chief commodity strategist Jeffrey Currie cut his 2022 Q4 price target by $10 to $100/bbl, while doubling down on his extremely bullish long-term oil price outlook. Below we excerpt the highlights from his note:

  • Over the last ten years, Brent prices have averaged a c.10% drawdown in November, in what has practically become a Thanksgiving tradition. While it's tempting to blame a lack of liquidity for another capitulation, we believe the market is right to be anxious about forward fundamentals, due to significant Covid cases in China and a lack of clarity on the implementation of the G7's price cap.

     
  • While confidence remains high in a 2Q23 China reopening and the structural bullish underinvestment thesis, the path between now and next spring remains highly uncertain. China's Covid cases are at Apr-22 highs, yet, the new policy reaction function is unknown. However, the logic of exponential virus spread, means further lockdowns will likely be required, if full reopening is not feasible. Therefore, we cautiously lower our expectations for China demand by 1.2 mb/d in 4Q22, equivalent to the effective cut recently implemented by OPEC+, the group's first successful preemptive curtailment.
  • Meanwhile, Russia oil export flows are being maintained at elevated levels as inventories are drained ahead of the imminent implementation of the EU crude embargo. Consequently, we expect a lagged impact of the embargo on production, raising our expectations by c.0.3 mb/d over 4Q22.

According to Goldman, the net impact of the above is a ~1.5 mb/d loosening of 4Q22 balances, lowering the bank's 4Q22 Brent forecasts by $10/bbl, to $100/bbl. But according to Currie's calculations, markets have already priced a 2 mb/d softening over the next 3 months, as these fundamental developments occurred during a seasonally low liquidity period, with discretionary positioning at post-pandemic highs, activating CTA sell triggers, exacerbating the move lower.

To be sure, WTI has notably underperformed, with prompt spreads plunging into contango, as the grade suffered from a unique combination of factors:

  • (1) a disruption to a USGC pipeline;
  • (2) soaring dirty tanker rates; and
  • (3) quality concerns causing WTI to discount sequentially by c.$5/bbl+ from similar grades.

Goldman concludes that until broader macro stability - directly linked to the inevitable Chinese reopening from its artificial "covid zero" policy, which are nothing more than a scapegoat for Xi's foundering economy - is able to generate an increase in passive flows, the burden of proof remains on fundamentals. To that end, Currie's advice is to monitor both Russia's export flows, as well as China's pandemic response in the coming weeks (if ignoring WSJ hit pieces). More importantly, for longer-term investors, "the current sell-off provides an opportunity to add length on yet another speed bump that will come to pass." Here's why:

While the market has rightfully reassessed year-end fundamentals more bearishly, spot balances have pivoted into deep draws since late October of c.-1.5 mb/d versus a 2017-19 average build of +0.5 mb/d (Exhibit 19). This has been driven by both landed crude (ex China), as well as oil on water (ex-Russia origin). However, with Russia supply and China demand both tracking bearishly on our high frequency modeling, these draws are indicative of robust spot demand (ex-China). This is corroborated in our global hard current activity indicators, reflecting realized demand, versus soft activity indicators which tend to be more forward-looking (Exhibit 23).

Global oil stocks remain at very depleted levels, just 100 mb above the YTD lows. Moreover, OPEC+ has just started its preemptive 2mb/d quota cut (worth 1.2 mb/d in actual production in our view), into a market that was already in a seasonally-adjusted deficit (Exhibit 21). This is all despite Russia maintaining production just below pre-war levels.

The underlying trends in the balances therefore seem intact, in our view, with energy equity price action a testament to this. China's lockdowns, like all previous waves, will come to pass, and the country should reopen fully domestically next year. We still believe Russian production will decline sequentially c.0.6 mb/d from here, with risks of a deeper, more abrupt disruption, still present. Thus, while we downgrade our 4Q22 Brent forecasts by $10/bbl (to $100/bbl), we maintain our forecast for $110/bbl Brent next year, with risks still skewed higher should inventories fully deplete once again. This could occur in 1H23 if OPEC+ maintains its current quotas and global activity and employment remain at high levels.

Therefore, for longer-term investors, the current sell-off provides an opportunity to add length on yet another speed bump that will come to pass. From a tactical perspective, uncertainties abound, while discretionary positioning is still long and CTAs flows will be selling, leaving risks skewed lower in the near-term.

More in the full report available to pro subs.

Tyler Durden Mon, 11/21/2022 - 15:00

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EUR/AUD potential short-term downside pressure after upbeat China data

China’s Q3 GDP, Retail Sales, and Industrial Production for September beat expectations. China’s Country Garden is still at risk of an imminent default…

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47 mins ago

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October 18, 2023

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  • China’s Q3 GDP, Retail Sales, and Industrial Production for September beat expectations.
  • China’s Country Garden is still at risk of an imminent default as its grace period of overdue bond coupon payments of US$15.4 million expires today.
  • The FX market is ignoring the default risk of Country Garden as the offshore yuan (CHN) has continued to trade sideways against the US dollar since 28 September.
  • The resilience of CNH against the US dollar has triggered a dissipating US dollar strength movement against CHH’s proxies (AUD & SGD).

China’s trio of key economic data has managed to surpass expectations to the upside where Q3 GDP came in at 4.9% y/y, above consensus estimates of 4/4% but below Q2 print of 6.3% y/y. Growth in retail sales for September rose at the fastest pace in four months; 5.5% y/y accelerated from 4.6% y/y in August and beat expectations of 4.9% y/y.

Industrial production also managed to beat expectations marginally as it grew 4.5% y/y in September, above consensus estimates of 4.3% y/y but unchanged from 4.5% y/y in August.

Overall, the current targeted approach of expansionary fiscal and monetary policies adopted by China’s top policymakers seems to be working at this juncture and has negated the risk of a deflationary spiral triggered by a prolonged property market crisis and weak external demand. Also, a growing hope that China will be able to meet its 2023 official annual GDP growth target of around 5%.

Liquidity crunch is still lingering in China’s property market

However, the coast is not all clear yet to bring out the champagnes for an early celebration as severe liquidity crunch conditions are still lingering in China’s property market where the canary in the coal mine now is Country Garden, the largest private property developer.

Time is running out for Country Garden to restructure its overdue coupon payments of US$15.4 million of a public dollar bond as its grace period expires today, 18 October where a no payment will trigger a default clause. Even if Country Garden manages to doge the “default bullet” today, it still has a slew of overdue coupon payments of dollar bonds where their respective grace periods are expiring soon with the next one on 27 October for overdue coupon payments that amount to US$40 million.

FX market is ignoring the heightened default risk of Country Garden

Fig 1:  USD major pairs rolling 5-day performance as of 18 Oct 2023 (Source: TradingView, click to enlarge chart)

Interestingly, current short-term price action movements depicted in the foreign exchange market are not pricing in the potential imminent default of Country Garden that can trigger a systemic risk in China and even globally. The offshore yuan (CNH) has been resilient against the recent US strength seen against the European currencies (EUR & GBP). The USD/CNH rate has managed to hold steady below a minor range resistance of 7.3280 since 28 September.

The current bout of sideways movement seen in the USD/CNH has managed to trigger a minor US dollar underperformance against the yuan’s proxies such as the AUD, and SGD. Based on a five-day rolling performance basis as of 18 October 2023, the USD strength against the AUD has dissipated since Tuesday, 17 October, and the USD/AUD has now recorded a gain of just +0.54% at this time of the writing from around +1.25% earlier.

EUR/AUD bearish reaction from 50-day moving average

Fig 2:  EUR/AUD minor short-term trend as of 18 Oct 2023 (Source: TradingView, click to enlarge chart)

One of the AUD cross pairs that is being impacted by the current set of rosy China’s key economic data is the EUR/AUD.

In the lens of technical analysis, the current price action movements of EUR/AUD indicate a further potential corrective decline at least in the short term.

Several bearish elements have emerged; the recent +170 pips rebound from its minor swing low of 12 October 2023 has stalled right at the 50-day moving average where the EUR/AUD has been trading below it in the last four weeks.

The 4-hour RSI momentum indicator has staged a momentum bearish breakdown below a parallel ascending support at around the 50 level and has not reached the oversold condition (below 30).

These observations suggest that short-term downside momentum has resurfaced which in turn supports a further potential down move in EUR/AUD.

Watch the near-term support at 1.6550 (also the 20-day moving average) and a break below it may see a further slide to retest the 29 September 2023 swing low area of 1.6360/6320 in the first step.

However, a clearance above the 1.6710 key short-term pivotal resistance invalidates the bearish tone for a squeeze up towards the next intermediate resistance at 1.6890 (minor range top from 25 August/5 September 2023 and the 76.4% Fibonacci retracement of the prior minor short-term downtrend phase from 17 August 2023 high to 29 September 2023 low).

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Three Big Biopharmaceutical Stocks to Buy Due to Product Pipeline

Three big biopharmaceutical stocks to buy are bearing fruit due to their strong product pipelines. The three big biopharmaceutical stocks to buy shine…

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3 hours ago

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October 18, 2023

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Three big biopharmaceutical stocks to buy are bearing fruit due to their strong product pipelines.

The three big biopharmaceutical stocks to buy shine amid their peers even though that sector’s performance has been “underwhelming” compared to the broader market with the S&P 500 up 13.90% vs. a 6.08% drop for the biotech year to date, according to a recent BofA Global Research report. The reasoning is that sector rotation has put biotech at a disadvantage against a better macro-economic scenario of a “soft landing,” according to the report.

The focus for investors interested in exposure to big biopharmaceutical stocks is a company’s strength of “commercial execution,” versus macro risks, BofA wrote in its research note. With third-quarter earnings season about to start, biopharmaceutical companies with promising products should stand out.

Despite market headwinds of ongoing food and energy inflation, an expanding auto strike and diplomatic challenges in the Middle East, Ukraine, Russia and Iran, the market is trading better than most observers would expect, Perry recently wrote to his Cash Machine subscribers. It also explains why investors with a collective $5.5 trillion are content to collect 5%-plus in guaranteed short-term cash instruments and Treasuries, he added.

Paul Dykewicz interviews Cash Machine investment newsletter leader Bryan Perry.

Three Big Biopharmaceutical Stocks to Buy and Why

The three big biopharmaceutical stocks to buy offer both dividends and a chance for capital appreciation. Perry, who currently averages a dividend yield of 10.8% with Cash Machine’s 29 recommendations, recently wrote that investors can take heart that the Personal Consumption Expenditures (PCE) index data released by the U.S. Bureau of Economic Analysis on Sept. 29. The data showed overall inflation dipping below 4% on an annual basis. When excluding volatile food and energy prices, the latest rise in the key inflation gauge of the Federal Reserve was just 0.1%, a 3.9% increase from the same time span last year.

Three Biopharmaceutical Stocks to Buy: Eli Lilly

Indianapolis, Indiana-based Eli Lilly & Co. (NYSE: LLY) is one of three big biopharmaceutical stocks to buy that are buoyed by their product pipelines.

The stock gained the attention of co-editors Mark Skousen, PhD, and Jim Woods of the Fast Money Alert trading service that features recommendations of both stocks and options.

Mark Skousen, head of Five Star Trader and scion of Ben Franklin, talks to Paul Dykewicz.

Lilly makes a diabetes shot called Mounjaro that company management is hoping will gain Food and Drug Administration (FDA) approval later this year as an obesity treatment. Lilly’s leaders also discussed working on a next-generation diabetes and weight-loss drug called Retatrutide.

Strong revenue and earnings growth of LLY, along with the promise of millions in additional revenue each quarter for its next-generation weight-loss drug,  has the stock surging. During the past 52 weeks, shares are up 87.40%. Lilly’s price performance puts the company’s shares in the top 2% of all stocks on a relative price strength basis.

As shown by the chart below, LLY shares are on a tear, up some 7.12% in the past month and breaking out to new highs on a bullish cup-with-handle pattern. That performance bests its industry, which is down 1.44% in the last month.

Paul Dykewicz meets with Jim Woods, head of Intelligence Report.

The co-leaders of the Fast Money Alert trading service profited from Lilly last year. the duo produced a 11.06% total return in barely five months on October 17, 2022, after its recommendation on May 16, 2022. Now, they are looking to cash in again.

Chart Courtesy of www.stockcharts.com

BofA recently increased its price objective for Lilly to $700 on the back of its clinical and commercial success, with the bullishness based on tirzepatide’s likely approval in obesity during the fourth quarter this year and the company’s incretin pipeline featuring orforglipron and retatrutide. Plus, Lilly has been putting its cash to work with a slew of mergers and acquisitions (M&A) activity, including acquisitions of Versanis, Sigilon, DICE and POINT Biopharma, which BofA  wrote investors seem to view favorably.

Three Big Biopharmaceutical Stocks to Buy: Bristol-Myers Squibb

BofA also has a “Buy” recommendation on Bristol-Myers Squibb (NYSE: BMY), of Princeton, New Jersey. Heading into the third quarter, commercial performance from core products such as Opdivo and Eliquis, as well as nine significant new product launches, likely will be top of mind for most investors, BofA opined.

While solid growth from Opdivo, up 13% year over year (y/y), Eliquis, rising 8% (y/y) and the Big 9 new launches, soaring 80% (y/y), is expected, BofA wrote it will take the company a few more quarters for Camzyos and Sotyktu to reach an inflection point. Further, cell therapy products like Abecma and Breyanzi likely will continue to face headwinds from manufacturing and supply in the third quarter, BofA wrote.

BofA wrote that it continues to view Bristol’s shares as attractive, given its robust new product cycle and reasonable valuation of 8x forward P/E, compared to 16x for its peers. The investment firm reiterated its buy rating and $80 price objective on BMY.

Skousen previously recommended Bristol-Myers Squibb profitably in his TNT Trader service that features both stocks and options. In less than two months after he advised its purchase on December 10, 2019, he told his subscribers to take a profit. His related call option recommendation turned a profit, too.

Chart Courtesy of www.stockcharts.com

Three Biopharmaceutical Stocks to Buy: Merck

BofA wrote the Merck & Co. Inc. (NYSE: MRK), of Rahway, New Jersey, is poised to deliver another solid commercial third quarter, driven by strong growth from core products such as Keytruda and Gardasil. Indeed, BofA wrote it expects robust growth of Keytruda in 3Q, spurred by recent approvals in adjuvant lung, continued market penetration and solid data updates.

The investment firm expects strong demand, aided by increased supply due to new manufacturing capacity in 2023/24. Looking forward, BofA forecast  investors likely will focus on FDA approval and launch of sotatercept in the first half of 2024. BofA added that market uptake could be robust, given the close-knitted community and treatment centers.

“Ultimately, we remain bullish on MRK shares, given its strong core business,” BofA wrote in a recent research note.

BofA reiterated its buy rating on Merck and set a price objective of $130 per share.

Chart Courtesy of www.stockcharts.com

Three Biopharmaceutical Stocks to Buy: Stocks or Funds?

Another keen observer of the industry is Bob Carlson, a pension fund chairman who also heads the Retirement Watch investment newsletter that features a variety of portfolios. As a risk-averse pension fund leader, Carlson favors funds to enhance diversification and reduce risk.

“I still believe biotech and pharmaceuticals will do well, though they haven’t done well recently,” Carlson told me. “The companies continue to develop new, innovative products.”

Bob Carlson, head of Retirement Watch, gives an interview to Paul Dykewicz.

For a broad-based exposure to biotechnology, consider the ETF iShares Biotechnology (IBB), Carlson advised. The fund tracks the ICE Biotechnology Index, which is composed of U.S.-listed companies. It owns mostly large and mid-cap companies, though about 20% of the fund is in small and micro-cap firms.

IBB recently had 261 stocks, but 56% of the fund was in the 10 largest positions. Top positions were Amgen, Vertex, Regeneron, Gilead Sciences and Seagen. The turnover rate is only 13%.

The fund lost 13.69% in 2022 and is down 6.68% so far in 2023. It lost 4.51% in the last three months and is up 2.54% over 12 months. The dividend yield is around 0.25%.

Three Biopharmaceutical Stocks to Buy: ETFs Offer Alternative

Investors who want to focus exclusively on pharmaceuticals can consider First Trust Nasdaq Pharmaceuticals (FTXH).

The fund tracks the index in its name. About 55% of the fund is in stocks that Morningstar classifies as either giant or large. The stocks in the ETF also on average sell at lower valuations than other health care companies. Almost all the companies are listed in the United States.

FTXH recently owned 50 stocks, and its 10 largest positions were 56% of the fund. Top holdings were AbbVie, Johnson & Johnson, Merck & Co., Pfizer and Bristol-Myers Squibb. The turnover ratio is 76%.

The fund gained 2.55% in 2022 but is down 4.57% so far in 2023. It slid 0.24% in the last three months but rose 7.07% in the past 12 months. Its dividend yield is around 1.67%.

Three Biopharmaceutical Stocks to Buy: Political Risk

The Hamas attack of Israel that triggered a war and Russia’s sustained invasion of Ukraine remain a big factor in keeping lifting political risk for investors. Political risk could rise further after the Russian Defense Ministry released documents recently indicting its military spending could rise by more than 68% in 2024 to reach $111.15 billion. That amounts to about 6% of Russia’s gross domestic product (GDP), more than the country’s spending on social programs, according to Moscow Times. Russia’s military spending is set to total about three times more than education, environmental protection and health care spending combined.

The three big biopharmaceutical stocks to buy offer the appeal of both income and potential capital appreciation. Dividend-paying biopharmaceutical stocks should have extra staying power for investors willing to buy shares in them.

Paul Dykewicz, www.pauldykewicz.com, is an award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Crain Communications, Seeking Alpha, Guru Focus and other publications and websites. Paul can be followed on Twitter @PaulDykewicz, and is the editor and a columnist at StockInvestor.com and DividendInvestor.com. He also serves as editorial director of Eagle Financial Publications in Washington, D.C. In that role, he edits monthly investment newsletters, time-sensitive trading alerts, free weekly e-letters and other reports. Previously, Paul served as business editor and a columnist at Baltimore’s Daily Record newspaper and as a reporter at the Baltimore Business Journal. Plus, Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many other sports figures. To buy signed and specially dedicated copies, call 202-677-4457.

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Chinese Data Dump Steamrolls Expectations, Setting Victorious Stage For Xi’s BRI Address

Chinese Data Dump Steamrolls Expectations, Setting Victorious Stage For Xi’s BRI Address

With Xi preparing to address delegates from 130 nations…

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4 hours ago

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October 17, 2023

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Chinese Data Dump Steamrolls Expectations, Setting Victorious Stage For Xi's BRI Address

With Xi preparing to address delegates from 130 nations around the world at the third Belt and Road Initiative Forum, we should not be too surprised if the deluge of Chinese macro data tonight - headlined by Q3 GDP - will beat expectations.

In fact, as Bloomberg's Chang Shu and David Qu noted, China’s recovery could be starting to get some traction, supported by stronger public investment and monetary easing, as weekly activity data rebounded in September...

...and overall China data has surprised more to the upside in recent months (admittedly against very weak expectations)...

However, bear in mind that base effects will dampen the year-on-year readings.

Growth in 2Q23 was flattered by a comparison with a depressed performance in 2Q22 caused by the Zero-COVID lockdowns. That boost will be gone in 3Q23, so most economists will be focused on the QoQ growth.

The Yuan has been relatively stable since the end of Q2, after plunging in Q1 and Q2...

And, despite all the pumping and support, China's Credit Impulse remains negative (for the 5th month in a row) as its real estate market continues to implode sucking up every yuan to fill the hole-filled bucket balance sheet of Chinese citizenry...

Oh and while we are discussing that, China Property Stock gauge plunged to its lowest since 2009...

So, eyes down for a fun night of 'adjustments' from Beijing.

China's GDP growth YoY in Q3 was expected to come in at +4.5% (down from +6.3% in Q2) but most eyes will be focused on the QoQ number (+0.9% exp) due to base effects from the COVID lockdowns.

The headline QoQ GDP printed +1.3% (better than expected).

Helped by a downward revision for Q2 from +0.8% to +0.5%. The headline YoY data beat expectations (+4.9% YoY vs +4.5% exp and +5.2% YTD YoY vs +5.0% YTD YoY exp)...

Industrial Production and Retail Sales beat expectations...

  • *CHINA SEPT. INDUSTRIAL OUTPUT RISES 4.5% Y/Y; EST. 4.4%

  • *CHINA SEPT. RETAIL SALES RISE 5.5% Y/Y; EST. 4.9%

While the data show increasing consumer spending growth, the big downside is that China’s property slump is still deep and ongoing.

  • *CHINA JAN.-SEPT. FIXED INVESTMENT RISES 3.1% Y/Y; EST. 3.2%

  • *CHINA JAN.-SEPT. PROPERTY DEV. INVESTMENT -9.1% Y/Y, EST. -8.9%

Worse still, the area of property sold fell 7.5% in September, lower than -7.1% seen the previous month.

Chinese unemployment miraculously tumbled to 5.0% - the lowest since Oct 2021.

Of course, China continues to hide its youth unemployment rate - after it reached record highs at 21.3% in June.

China's statistics bureau said in the release, overall, China’s economy continued to recover in the first three quarters, laying a “solid foundation” for achieving the full-year development goals. Although, China once again warned of the external environment, saying it is becoming more complex and severe.

Under the hood, the fastest growing retail sales categories relate to vice and virtue.

Tobacco and alcohol sales were up a massive 23.1% year-on-year, a remarkable number (the highest recorded since April 2021). Sports items sales surged 10.7%.

So to sum things up - while investment (especially property) continues to be ugly everything else beat (miraculously)

Michael Hirson of 22V Research says in a note he’s paying most attention to signs of any recovery in household and private sector demand.

“Property sales and related indicators will provide a sense of whether recent easing measures are having an effect preliminary data suggest a pick-up in sales in the largest markets (tier 1 and some tier 2) but one that is thus far limited in its strength and breadth,” he wrote in a note.

“On the consumption side, August showed some improvement in household spending on goods, rather than just services, and it will be important to see whether there are further signs of progress as reflected not only in monthly retail sales but also the quarterly survey of household income and spending.”

Given his thoughts, property sales and investments data were ugly - not a good sign... and on the consumption side, everyone was celebrating their non-job 'job'.

The bottom line from the data - China bottomed... a perfect narrative for Xi.

Tyler Durden Tue, 10/17/2023 - 21:15

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