Morning Notes — Crude and SPX Support

Crude: A few months ago, we suggested the Saudis response to an Iran nuclear deal (they don’t get along) would likely include reduced production. Over the weekend, Iran dropped some of its major demands for a nuclear deal, which has increased the probability for an agreement to be reached. Yesterday afternoon, the Saudi Oil Minister noted that current prices fail to reflect true supply/demand dynamics and that oil price volatility may force OPEC+ to tighten production in order to stabilize prices. OPEC+ has been underdelivering on quotas for nearly 18 months. The main reason for the shortfall is the group has lacked the excess capacity, and partially the desire. Put simply, when you leave OPEC in charge of oil production (when US capacity is constrained), oil prices go higher. Iran’s oil production capacity is small (~2.4M/day and likely overstated) relative to Saudi Arabia (12.4M and likely understated) and an Iran nuclear deal would likely result in lower overall production and higher crude prices.

SPX: The rally off the mid-June lows was largely driven by short-covering amid broadly depressed positioning dynamics. Last week, we suggested the near-term short-covering move was nearly exhausted when average daily short-covering volume over the prior four weeks became a ~3 standard deviation event. Yesterday’s sell-off started with a flurry of short-selling right at the open, but then quickly dissipated with an absence of buyers and light volume throughout the day.  Unfortunately, this type of market behavior is fairly typical for late August, and it’s important to discount its signal quality. Technical support for the SPX sits at ~4080 and we keep a bullish bias above that level.