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Trending: Oil price recession continues, but small caps lap up tax pledges

Top OPEC oil producer Saudi Arabia made a large cut in its crude output in January to support prices and lessen a glut, helping boost compliance with the group's supply-reduction deal to a record high of 92%. Yet oil prices sank again
Trending: Oil price recession continues, but small caps lap up tax pledges
OPEC cuts haven't had the desired effect of raising oil prices

The start of the week saw two trends affecting north American markets.

The first was the paradox of stubbornly low oil prices despite OPEC’s bullish report on a supply cull.

Top OPEC oil producer Saudi Arabia made a large cut in its crude output in January to support prices and lessen a glut, helping boost compliance with the group's supply-reduction deal to a record high of 92%.

The Organization of the Petroleum Exporting Countries is curbing its output by about 1.2 million barrels per day (bpd) from Jan. 1, the first cut in eight years. Russia and 10 other non-OPEC producers agreed to cut half as much.

Supply from the 11 OPEC members with production targets under the deal fell to 29.888 million bpd last month, according to figures from secondary sources that OPEC uses to monitor its output. OPEC published the data in its monthly report on Monday.

Yet, both Brent crude and West Texas Intermediate (WTI) futures contracts were sizeably lower. Why? Well, it wasn’t disbelief in the numbers.

The fall in WTI, the US oil benchmark, by 1.8% to $52.92 and a 1.9% fall in Brent to $55.61 is symptomatic of two negatives for the market.

First of all, the pervading worry that American drillers will up supply. That has been seen over the past month as they open up output following a gain in oil prices.

Indeed, US drillers have brought 117 oil rigs back online since the beginning of December, adding rigs in ten of the past 11 weeks, according to oilfield services provider Baker Hughes (NYSE:BHI).

And before oil drillers get too excited it is worth noting that while crude prices have nearly doubled since their January 2016 lows they are still 51% lower than mid-2014 when the downturn in oil first began.

The US Energy Information Administration is slated to publish its monthly drilling productivity report today, which is expected to show an increase in US drilling.

That will provide some further fuel into how supply is on the rise, and may yet test OPEC’s and Russia’s resolve to want to curb their own supply. Compliance needs to be observed on both sides if oil prices are to rise sustainably.

The second factor is that much of the proposed cull in supply by OPEC is not fully priced into the market. Hence, confirmation that the Saudi's or other OPEC members managed to keep their word is rather weak for the markets to absorb.

On a brighter note, smaller stocks have begun to join in the record highs seen in the past week from the S&P 500, Nasdaq and Dow, following a pledge by US President Donald Trump to initiate tax cuts – notably to corporate tax – in the next few weeks.

Without access to the kinds of tax havens and shelters which large US corporations – legally – have, the stocks most likely to benefit from a reduction in their tax burden are smaller cap stocks, including an array of oil drillers, miners, tech, biotech and pharma stocks.

Although the actual tax cuts are sketchy the Russell 2000 marked a record high on Monday just shy of the 1,400 level.

But Trump’s image has been to chase the big corporations to employ more and produce more at home. After all, in a numbers game, large factories saved inside the USA is good PR.

But what is now hoped is that Trump will also acknowledge that it is the smaller companies, smaller employers but still accounting for a significant part of the workforce, who will feature high in the President’s thoughts. To that end, a cut in corporate tax will be a major boost.



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