The Saudi Put

You have heard about the so-called Fed put. That is a term that means the Federal Reserve has the markets back. If the markets or economy start to falter, the Fed’s plunge protection team will get into gear and adjust monetary policy to create a floor for the market. That, in turn, gives investors confidence to take on more risk because even if the market gets weak, the Fed won’t allow it to crash. Now with the recent rebound in oil, traders are now talking about the Saudi put. That is that Saudi Arabia will not allow oil prices to fall and if it does, they will cut production accordingly. In fact, the Saudi announcement that they want $80 a barrel of oil and that they will reduce their exports by 800,000 barrels a day is sending a signal to the market that the worst for oil may be over.

Of course, it helps that the global stock markets are showing more optimism. So-called progress on the U.S. China trade discussions is bringing the risk appetite back into the marketplace and cumulative measures talked about in Asia to boost their economy is changing the pessimism about overall energy demand. A senior Chinese official said China plans to introduce policies to boost domestic spending on items such as autos and home appliances this year. This comes after China lowered their reserve requirement for bank lending that, along with more stimulus should raise oil demand expectations.

This comes as the American Petroleum Institute reported that U.S. crude supplies fell by 6.1 million barrels for the week ending January 4, according to sources. This massive drop in supply is showing that previous cuts by the Saudis are already showing up and this could be the beginning of a massive drain on U.S. oil supplies.

Of course, that is looking forward. In the short term, the big drop in crude was offset by mindboggling builds in products. The API reported that gasoline stockpiles surged by an astounding  5.5 million barrels, while distillate inventories rocketed by 10.2 million barrels. The post-market reaction seemed to shrug off the product build and focus more on the crude draw.

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