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Crude stocks at Cushing, Okla. hit their lowest level in 14 months. (0:15) Hollywood writers set to return to work. (3:37) Here’s why a government shutdown could be even worse for stocks than 2018. (4:50)
This is an abridged transcript of the podcast.
Our top story so far
U.S. crude oil stockpiles at the Cushing, Oklahoma, storage hub have shrunk to their lowest in 14 months, causing concerns about the quality of the remaining oil and the potential to fall below minimum operating levels.
Further drawdowns at Cushing would also compound an already tight market due to Saudi and Russian oil supply cuts, potentially adding to upward pressure on oil prices.
Since topping 43 million barrels in June to reach a two-year high, Cushing’s inventory levels plunged nearly in half to just below 23 million barrels by September 15, the lowest since July 2022, and analysts expect another draw of as much as 1 million barrels in the week ending September 22.
Tank storage below 20 million barrels, or 10%–20% of Cushing’s 98M-plus barrels of capacity, is considered close to an operational low because the oil is difficult to remove at such levels, among other problems.
Strong refining demand, rising crude exports, and future prices that have been weaker than spot prices have drained Cushing’s tank farms, analysts say.
Oil prices are up about 30% since the middle of the year.
J.P. Morgan says the oil price rise is “a supply shock, but a modest one thus far.”
Strategists say this shock is not large enough to threaten the expansion by itself. However, there are concerns that the supply cuts are not finished or that they interact with a combination of other modest negative U.S. shocks, such as “an escalation of the UAW strike, a government shutdown, or the recent rise in US long-term interest rates.”
In today’s trading
Durable goods orders for August unexpectedly rose 0.2%. Economists were looking for a 0.5% decline. Core durables rose 0.4%, stronger than the expected 0.1% rise.
But Wells Fargo says after backing out a surge in defense spending and accounting for steep downward revisions, “the report gets a lot less exciting.”
They noted that “defense orders for capital goods in August increased a whopping $2.3 billion. So, if you set aside bookings from the Pentagon, new orders for capital goods in August actually decreased $2.6 billion, or 2.9%.”
Rates are retreating from significant milestone highs in the previous session. The 10-year Treasury yield (US10Y) fell back to around 4.50% after hitting the highest closing level since 2007.
The 30-year yield (US30Y) hit a cycle high, while 2-year, 5-year, and 10-year real yields are at their highest level since the Financial Crisis, which Deutsche Bank says “demonstrates how the impact of higher borrowing costs is still filtering through into the economy.”
Among active stocks
Wall Street bulls leapt to the defense of Costco’s (COST) post-earnings, despite the company failing to outline the timing of a membership fee income. Bank of America analyst Robert Ohmes and team expect Costco to invest in price early as costs come down, which is seen as supporting its value proposition and traffic.
NextEra Energy Partners (NEP) tumbled after saying it is lowering expectations for limited partner distribution per unit growth. It now sees growth of 5%–8% annually through at least 2026, with a target of 6% growth, citing higher interest rates and tighter monetary policy.
DocuSign (DOCU) rose as HSBC upgraded the stock, citing “signs of improvement in demand and stability.” Analyst Stephen Bersey raised his rating to Hold from Reduce but kept his $42 price target, noting that the company is making progress in “stabilizing revenue.”
In other news of note
Hollywood writers are ready to work after the governing boards of their unions approved a new contract with major studios. The strike, which lasted nearly five months, will still need to be endorsed by the writers themselves in early October, but the new deal will allow them to work during that process.
Late-night talk shows will be the first to resume production, but scripted episodes and films will take longer to return, with the Screen Actors Guild still on strike and similar negotiations likely taking place after the Writers Guild of America ratifies its agreement.
Writers were able to secure some big wins, including salary increases, bonuses for high-performing shows, and guarantees for a minimum number of staffers. Among the bigger provisions is the ability to share in the success of content that performs well on streaming services like Netflix (NFLX), or a residual payment based on viewership, which will be calculated by hours streamed and runtime.
Under the new contract that runs until May 2026, writers have the right to use AI with consent from their production partners, but they can’t be forced into using or incorporating AI-generated content (which must come along with disclaimers).
AI-generated storylines will also not be regarded as “literary material,” meaning computers cannot get screen credits or associated rights, though the language surrounding the usage of writers’ material to train AI was more controversial.
And in the Wall Street Research corner
The market has dealt with high rates and a government shutdown before, but this one looks worse, according to Pantheon Macroeconomics.
Economist Ian Shepherdson says “the stock market is reacting just as badly to the prospect of a shutdown as in December 2018.”
Back then, the “stock market tanked in the weeks before the record government shutdown from December 22, 2018, through January 26, 2019, and is on course for a repeat performance this time around,” he said. “The S&P 500 (SP500) (NYSEARCA:SPY) (IVV) (VOO) fell by 15.5% from its December 3 high to its low on December 22, as the shutdown began.”
“The market then rallied through the shutdown, recovering most of the lost ground before the federal government went back to work and breaching the December 3 level again on February 22,” he said. “The Nasdaq (COMP.IND) (QQQ) followed a very similar path.”
The market was also dealing with rate hikes at that time. But Congress had passed five bills before the 2018 shutdown, which meant 380,000 workers were furloughed. This time it’s zero, and that number will jump to more than 800,000.
Shepherdson concludes that markets are probably right to be nervous about the potential impact of an extended shutdown, “but they are worried too… that the Fed has gone too far.”
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