U.S. equities fell on Tuesday amid a stomach-churning breakdown in oil prices. Crude closed near seven-month lows amid a loss of confidence in OPEC's output freeze, a rise in U.S. shale production, tepid gasoline demand and bloated inventories (chart below). The result not only imperils the stock market's post-election uptrend -- as many energy stocks returned to February 2016 lows -- but it calls into question the health of the overall U.S. economy as well.
As oil slid, traders cited a Reuters article discussing rising Libyan production and increased exports of Nigeria's Bonny Light. Elsewhere, Morgan Stanley (MS) noted that identifiable oil inventories increased at a rate of around 1 million barrels per day in 2017's first quarter. And Bloomberg said oil tanker storage -- used for offshore inventory capacity when onhore facilities get full -- has hit a 2017 record.
It's becoming increasingly clear that OPEC's late-2016 production freeze agreement isn't reducing the global oversupply imbalance, as the oil sheiks had hoped. Instead, U.S. oil producers aggressively reduced their cost basis and have been increasing rig counts as prices rallied out of the February 2016 low. The collapse in U.S. gasoline usage (chart above) is concerning as well not only for the bearish implications for the oil market but because it could be a sign of broader economic woes.
Currently, the Citigroup Economic Surprise Index is showing economic data is missing analyst expectations on a scale not seen since 2011 (chart above). The post-election ebullience in the "soft" survey-based economic data is now fully faded, replaced with a hard realism that the hopes for pro-growth legislation from the Trump White House -- including infrastructure spending and tax cuts -- aren't going to happen anytime soon, if at all.
While this is a big-time negative for energy stocks, the broad market cannot ignore it no matter how much the bulls would like to focus on big-cap tech stocks like Amazon (AMZN), which tried and failed for the third day in a row to retake the $1,000 threshold.
Because remember: When oil prices suffered a waterfall decline from their 2014 high into the 2016 low, overall corporate earnings suffered a two-year-long recession. And from its 2015 high, the New York Stock Exchange Composite fell 20.5 percent into its February 2016 low. That's a bear market-level pullback.
Moreover, U.S. Treasury bonds continue to rally hard -- pushing down long-term yields -- as fixed-income traders price in a serious economic slowdown and nearly fully reverse the post-election rally in Treasury yields.
As long as this dynamic continues, stocks will be hard pressed to extend their recent gains because it will cast a pall on recent corporate earnings growth that largely resulted from a commodity-driven rebound in energy sector profitability.