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Oil set to ‘crater’ Monday as OPEC meeting delayed, tensions flare between Saudi Arabia and Russia

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Saudi Arabia’s Minister of Energy Prince Abdulaziz bin Salman Al-Saud and Russia’s Energy Minister Alexander Novak are seen at the beginning of an OPEC and NON-OPEC meeting in Vienna, Austria December 6, 2019.

Leonhard Foeger | Reuters

The virtual meeting between OPEC and its allies scheduled for Monday has been postponed, sources familiar with the matter told CNBC, amid mounting tensions between Saudi Arabia and Russia. The meeting will now “likely” be held on Thursday, sources said.

The Monday meeting was set after President Donald Trump said to CNBC on Thursday that he expected Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman to announce a deal to cut production by up to 15 million barrels, and that he had spoken to both countries’ leaders.

The delay is likely to hit oil prices next week following a record-setting comeback week for crude. U.S. oil surged 25% on Thursday for its best day on record, and gained another 12% on Friday. It finished the week with a 32% surge, breaking a 5-week losing streak and posting its best weekly performance ever, back to the contract’s inception in 1983.

“It’s probably going to crater,” Again Capital’s John Kilduff said. “There was a lot of optimism priced into oil Thursday and Friday. With this new Saudi, Russia spat, it doesn’t look like it’s going to come together.”

Despite last week’s surge, West Texas Intermediate crude is still down nearly 40% in the last month on the heels of demand destruction from the coronavirus outbreak, and the price war between Saudi Arabia and Russia.

Friday’s jump was fueled by a Reuters report that OPEC+ was contemplating a production cut equivalent to about 10% of world supply, and that Putin said a cut of 10 million barrels a day appeared possible.

Both Saudi Arabia and Russia have sought U.S. cooperation in balancing the world oil supply. American drillers are still pumping near record levels as the world is coming to the edge of its ability to store oil.

U.S. oil executives met with the president Friday at the White House, and there was speculation he would ask them to cooperate in cuts. No agreement came of the meeting, but Trump did seem to reflect an industry view that market forces should determine prices. 

“These are great companies and they’ll figure it out,” he said at a White House briefing following his meeting with the energy CEOs. “It’s a free market, they’ll figure it out.”

At its March meeting, OPEC proposed cutting production by 1.5 million barrels per day in an effort to combat the demand slowdown, but OPEC-ally Russia rejected the additional cuts. The meeting ended with no agreement, and in retaliation Saudi Arabia slashed its oil prices in an effort to gain market share, and subsequently increased its production to a record high of more than 12 million barrels per day.

Tensions between Saudi Arabia and Russia have escalated since. In comments Friday, Putin blamed the collapse in oil prices on Saudi Arabia pulling out of the more than 3-year-old OPEC plus deal, along with its increase in production and agreements for discounts, all of which exacerbated the blow from the coronavirus.

Saudi Arabia lashed back. In a statement Saturday, Saudi Foreign Minister Prince Faisal bin Farhan reportedly said Putin’s comments were “devoid of truth.”

Saudi Arabia energy minister Prince Abdulaziz bin Salman also issued a statement Saturday saying comments from Russia’s energy minister Alexander Novak “were categorically false and contrary to fact.” The statement said the Saudi minister “expressed his surprise at the attempts to bring Saudi Arabia into hostilities against the shale oil industry.” The minister noted that Saudi Arabia was a major investor in the U.S. oil sector.

“Now we have two issues,” said Helima Croft, head of global commodities research at RBC. “After President Trump’s statement it seems rather unlikely any production commitment is forthcoming. And it looks like we might have a new diplomatic rift between Russia and the Saudis…The Saudi minister is pushing back furiously on the Russian minister’s assertion that the Saudis are targeting shale.”

The U.S. oil industry is divided on whether it could or should contribute to production cuts in an effort to stabilize prices.

The American Petroleum Industry opposes cuts, saying such a move would harm the U.S. industry. In Texas, however, Ryan Sitton, one of the three members of the Texas Railroad Commission, has said that the state would consider participating in such a deal.

OPEC has invited the Texas commission to participate in its June meeting, and Sitton said on Thursday that he spoke to Russian energy minister Alexander Novak about production cuts.

Oil producing states, like Texas, have the authority to manage production, though the federal government cannot manage production and a consortium of companies cooperating would be seen as an anti-trust violation. The Texas commission last restricted output in 1970. It has set a meeting set for April 14.

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Market closes above a key milestone, setting up stocks for more gains

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The Wall Street Bull (The Charging Bull) is seen during Covid-19 pandemic in New York, on May 26, 2020.

Tayfun Coskun | Anadolu Agency via Getty Images

The stock market closed above a key milestone and looks set to keep moving higher for now.

The S&P 500 broke above its 200-day moving average for a second day, but this time succeeded in closing above it. The S&P 500 surged 44 points to 3,036 on Wednesday, after trading weaker early in the day. Before this week, the S&P was last above the 200-day on March 5.

The 200-day happened to be at 3,000, a level that is also seen as psychologically important.

The market was helped Wednesday by a steadying in momentum names, like Netflix and Tesla that touched their lows of the day just before 11 a.m. ET.  The S&P 500 hit its low at about the same time, as the group which includes the FAANG names, Facebook, Apple, Amazon, Netflix and Google parent Alphabet, all started to turn higher.  

Those big tech names that have been drivers of the market took a rest this week, as traders focused on names that will benefit from a reopening economy, like airlines, banks and industrials. The S&P financial sector is up more than 9.6% this week so far, and industrials are up more than 7.%. Communications services, which includes internet names, was up just 0.8%.

“Another feather in the hat of the market for reclaiming the 200-day. We’ll see where it takes us,” said Scott Redler, partner with T3Live.com. “Tech had one more washout recovery to relieve some pressure and got back in line. I wouldn’t be surprised if tech acts better and the reopening trade takes a rest, like banks and the airlines.”

The 200-day is simply the average of the closing prices for the last 200 days for an index or even individual stock. In the case of the S&P 500, some investors view the 200-day as a line in the sand, where they will go long above  that level but not below it. That can generate interest in the market and help pull it higher.

Redler said the S&P 500 could face new resistance when the index reaches 3,080, a zone where the market broke down in March.

Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, said the broadening out of the rally has been important and should help propel stocks. “The market has to figure out there’s more than one story to price,” he said, noting it would be hard to have a sustained rally without FAANG.

“In order to have a sustained rally, you needed broader participation. We still worry their fundamentals are not consistent with … gains we are seeing, especially in a lot of those smaller regional banks,” he said. Christopher said it’s unclear what kind of loan losses they could face in real estate, and from businesses like restaurants. 

“The rotation we’re seeing is a rotation to value, to small caps. It’s as if everything that got beaten up was getting a bid,” he said.

Christopher said there are headwinds for the market, including the rising tensions between the U.S. and China. That could come into focus later in the year, as the presidential election gets closer and candidates discuss China relations. For now, however, the V-shaped recovery is being seen as possible by some investors who see progress in the reopenings, he said.

“I don’t think this has registered yet,” Christopher said. “The market is still paying all of its attention to the accumulation of recent hopeful signs, not to cold hard facts, about a vaccine, a successful opening and a V-shaped recovery, which had been dismissed before.”

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Asia Pacific stocks set to jump as U.S.-China tensions ramp up

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U.S. Secretary of State Mike Pompeo told Congress on Wednesday that Hong Kong was no longer autonomous from China, raising questions over the special administrative region’s favorable trade relationship with the U.S.

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Huawei CFO loses major battle in extradition fight

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Meng Wanzhou, chief financial officer of Huawei Technologies Co., leaves the Supreme Court in Vancouver, British Columbia, Canada, on Tuesday, Oct. 1, 2019.

Trevor Hagan | Bloomberg | Getty Images

Huawei’s chief financial officer Meng Wanzhou lost a major legal battle in her fight against extradition to the U.S. to stand trial on fraud charges.

In the Wednesday ruling, the Supreme Court of British Columbia found that the case against Meng meets a standard called “double criminality,” where the acts the U.S has accused her of are also illegal in Canada. The next phase of proceedings will begin next month. 

Diplomatic tensions are rising as Meng, who is the daughter of Huawei founder Ren Zhengfei, will have to remain in Vancouver on bail during a lengthy extradition process. 

Shortly after the court’s decision, the Chinese Foreign Ministry urged Canada to release Meng immediately and ensure her return to China. The Global Times, which is aligned with the Communist Party of China, blamed the U.S. for the ruling, saying Canada’s judicial and diplomatic independence has fallen to “U.S. bullying.” 

Huawei, the world’s largest telecommunication supplier, has been a flashpoint for the Trump administration’s trade battles with China. Shortly after Meng was arrested in December 2018, President Trump weighed in on the extradition case, telling Reuters he might consider “intervening” in the case if it would help the U.S.- China trade war. On Wednesday afternoon, legislation calling for sanctions against China passed both houses of Congress; President Trump has not said whether he intends to sign it into law.

The U.S. Commerce Department has also targeted Huawei. It blocked shipments of semiconductors to the company from chip-makers. That followed the administration’s move to keep Huawei on the U.S. Entity List, a blacklist that restricts American firms doing business with the company. The ban is hitting Huawei’s bottom line. The company reported it saw slowing revenue growth in 2019

Huawei said it was “disappointed” in the ruling and maintained Meng’s innocence.

Meng is due back in court June 15.

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