The Fed That Stole Christmas

You're too hawkish, Mr. Powell, You should have been a dove. The statement cuddly as a cactus, the press conference as charming as an eel. Mr. Powell, the market slipped like a banana with a greasy black peel. Face the music.

Feel the market,  Mr. Powell, the chart’s an empty hole, liquidity is getting tighter. Don’t take away the punch bowl, Mr. Powell, now folks won’t touch stocks with a thirty-nine-and-a-half-foot pole. No one's denying. It’s a style thing, Mr. Powell. You can’t have termites in your smile. The markets are acting like a seasick crocodile, Mr. Powell. Given the choice between raising or not raising rates. You had better wait for a while.

The Fed sank oil late in the day, killing a rally that was built on record demand for oil. Lost in all the bearishness created in part by the Federal Reserve, was the fact that the total demand for petroleum hit a record high of 27.781M bpd. The previous high was 27.068M bpd which was broken by 713k bpd. Now you would think that demand along with a major production cut from OPEC and its co-conspirators the Russians, would have the market fearful of a shortfall of supply in the New Year. Yet, the oil market is selling on fears that the good times won’t last and the hope that US shale producers will make up for OPEC production cuts even as their cash flows become more negative and the price drop will cause their losses to surge.

The party line post-Fed was that the markets wanted the Fed to be more dovish, but I don’t think that is the whole story. The market was fine with the rate increase because it was priced in. Initially, the market was even happy with the Fed statement that lowered the rate hike outlook from three hikes in 2019 to two. Even though the market was hoping for more, the way that the Fed stood up to President Donald Trump and stayed strong on raising rates had the market respecting the FED.  It gave a bit of confidence as well that if the Fed was ignoring market turmoil and Presidential tweets than perhaps things in the economy are not so bad after all. That was until the press conference.

They should have left well enough alone. The Fed chair Jerome Powell did more damage than good. The market was stable after the statement but some of the answers to the questions by Powell seemed less convincing that the Fed was as confident about the economy and their decision. The market started to unravel after Powell said, “There’s a fairly high degree of uncertainty about both the path and the destination of any further increases.” That statement seemed to suggest the Fed was confused. It also was confused when Powell seemed to suggest that the Fed ignores the markets and watches the markets at the same time. Not exactly the confidence the market wanted to hear.

That hurt crude oil gains that were rising on a bullish inventory report. While the headline crude number came in a bit higher than expectations, the big drop in distillates should raise some real concerns of shortages assuming that the economy does not fall apart.

The Energy Information Administration said that U.S. commercial crude oil inventories decreased by 0.5 million barrels from the previous week. That was after another 426,000 barrels release from the SPR. That puts supply at 441.5 million barrels. U.S. crude oil inventories are about 7% above the five-year average for this time of year.

Yet distillates are a different story. Distillate fuel inventories fell by 4.2 million barrels last week and are about 11% below the five-year average for this time of year. Propane/propylene inventories decreased by 3.3 million barrels last week and are about 6% below the five-year average for this time of year. Total commercial petroleum inventories decreased last week by 10.3 m/b.

Still, while we may be short on distillate, gasoline supply is ample. Total motor gasoline inventories increased by 1.8 million barrels last week and are about 3% above the five-year average for this time of year. Finished gasoline and blending components inventories both increased last weeks.