Oil helping lift stocks in Santa rally

Oil could again be a positive catalyst for stocks Wednesday, as traders await government inventory data that could be more bullish than expected.

A plus for oil futures could be a positive for stocks, and stock futures Wednesday morning were pointing to a higher opening. Energy stocks were gaining, with both Exxon and Chevron higher with oil prices in pre-market trading. Nike shares rose after earnings in early trading, and touched record levels

Stocks gained Tuesday, led by materials, energy and industrials, but with consumer staples outperforming at the end of the day. The S&P 500 was up 18 at 2038, and the Dow jumped 165 points to 17,417, boosted by a near 5 percent gain in Caterpillar.

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Stocks have had a difficult time rising when oil is in decline. “We tried testing it (Monday) where oil fell and the market rose a little but just couldn’t sustain itself,” said Jack Ablin, CIO of BMO Private Bank. “The market’s tied to oil.”

Ablin said the oil story is really about pain in the credit markets, where high yield and even investment grade spreads have widened for energy companies. “When the credit markets are unhappy, everyone’s unhappy,” said Ablin.

Wednesday is the last full trading day of the week, as Thursday is a half-day for the Christmas Eve holiday. There are a few important pieces of data including personal income and spending and durable goods, released at 8:30 a.m. ET, and new home sales and consumer sentiment reported at 10 a.m. ET. There was an inadvertent release Tuesday evening of some of the PCE data, showing spending up 0.3 percent, in line with expectations.

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In an event worth noting, WTI crude futures for February closed higher than Brent on Tuesday. It was the first time the WTI front month futures contract ended above the price of the international benchmark Brent futures since August 2010. WTI settled at $36.14, up 0.9 percent, while Brent was at $36.11 per barrel, up 0.7 percent.

WTI continued to trade higher, after the American Petroleum Institute released data that showed an inventory drawdown of 3.6 million barrels of crude. Government inventory data is expected at 10:30 a.m. ET Wednesday, and it was expected to show a build of under 1 million barrels. WTI was higher than Brent in early trading Wednesday.

Traders will be watching gasoline inventories, which showed a surprise bearish build of 3.1 million gallons in the API report.

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“We’re in a preholiday, low-volume environment,” said John Kilduff of Again Capital. “If the inventory report is bullish like API is indicating, there could be some fireworks.” He and other analysts said WTI and Brent could keep exchanging places, and WTI could easily fall below Brent again.

Analysts said WTI’s move is in part a response to Congress lifting the ban on U.S. exports. While there is not expected to be much in the way of exports until prices improve. WTI prices have been supported by the idea that more it can be sent outside the U.S.

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“Congress just added 10 cents to gasoline prices. We were heading to $32, and now we’re heading above $35,” said Kilduff.

The drawdown in supplies, noted by API, could also be in part a response to a Texas tax that is levied on oil holdings at the end of the year. For that reason, analysts have expected oil to move away from the Gulf Coast temporarily and either be stored on ships or moved to other storage, like Cushing, Oklahoma, the physical storage hub for NYMEX crude.

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The U.S. has more available storage space than other countries so more oil could also come into the country, which would be bearish. “If WTI gets to be sufficiently premium to Brent, it should attract more barrels into storage,” said Kilduff.

Traders have been focused on oil storage capacity because if supplies even threatened to reach capacity, that could trigger a fire sale for crude, and another steep drop in price.

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