Since 2022, the Department of Energy (DOE) has been selling oil from the Strategic Petroleum Reserves (SPR) to put a lid on rising oil prices. We can’t quantify how their efforts affected oil prices, but presumably, it did reduce oil prices. However, their effect is limited as Saudi Arabia cut production by over a million barrels per day in response to the DOE draining of reserves. As we share below, the SPR is now down to levels last seen in the 1980s.
Joe Biden and DOE Secretary Jennifer Granholm have made it clear they want to refill the reserve. To that end, the DOE just put out a statement saying they will post solicitations to buy oil through May. Currently, they are offering to purchase 6 million barrels for December and January delivery. While such actions seem prudent, especially in light of Middle East tensions, the DOE is putting a floor on oil prices. Per their statement: “DOE will purchase oil in those months where it can do so at a good deal for taxpayers: a price of $79 dollars per barrel.” They claim the average sales price is $95 a barrel. Purchasing at their floor price would create a profit. But, it will also keep prices above where they may have been.
What To Watch Today
Market Trading Update
Despite the barrage of speakers this past week suggesting that rate hikes are done, the market focused on the “one more hike” as a reason to unwind equity and bond positioning. As we noted previously:
“The break of the 20-DMA sets up a potential for a test of 4200. The 200-DMA is important support that should hold heading into next week.”
With Friday’s slide, the market settled on top of the 200-DMA and minor support going back to June. The market must rally on Monday to keep the current trading range intact. A confirmed break of the 200-DMA will suggest near-term downside risk.
Continue to manage risk for now, but be careful making significant changes following an options expiration day. Most likely, much of the noise will filter out by early next week. However, we must consider the risk of further downside until the month’s end.
The Week Ahead
With the Fed in a media blackout heading into next week’s FOMC meeting, earnings and economic data will take the spotlight. That said, Jerome Powell is scheduled to speak on Wednesday. However, the speech will likely not touch on monetary policy or the economy.
Earnings from some of the market-leading “magnificent seven” are on this week’s earnings slate. These include GOOGL, MSFT, META, and AMZN. Also of interest will be F, GM, BA, and MMM.
GDP and PCE will be the headline economic data of the week. Analysts expect third-quarter GDP grew at 4.1%, almost double the 2.1% of the prior quarter. Core PCE, the Fed’s preferred inflation gauge, is forecasted to rise by 0.2%.
Is China Really Growing At 5%?
China has a real GDP growth target of 5%, and not surprisingly recently reported that growth for the last quarter is near the target at 4.9%. If the numbers are accurate, which is always doubtful, China’s growth rate is recovering after slowly declining for over a decade. However, as Edward Albert shares in his graph below, the data is not as good as advertised. This matters because China has been growing much quicker than most developed nations. As such, their growth has been a source of growth for the U.S. and other nations.
The problem with China’s GDP report is that real GDP was boosted by 1.4% due to deflation. When the price deflator is negative, as we see, it means that real growth is higher than nominal growth. In this case, nominal growth is only 3.5%, which aligns with recent trends. The integrity of the report certainly is questionable, given that inflation, not deflation, is a global problem. On the other hand, given their exporting prowess, if they are experiencing deflation, they are essentially exporting deflation to the world.
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