Oil Eases as Funding Pressure Persists
Oil prices eased before Friday’s U.S. open, offering a little relief after Thursday’s sharp rise. Reuters reported Brent crude futures at 102.58 dollars a barrel at 8 a.m. Eastern, down 1.70 dollars, or 1.63%. President Trump had said Thursday that the U.S. would not attack Iran before the November 3 elections and that talks were making progress. Those are policy statements, not a completed peace agreement.
We welcome the easing, but the useful test is whether it lasts long enough to lower the costs businesses actually pay. A cheaper futures contract does not immediately mean cheaper diesel, freight or insurance. Reuters also reported that China was set to resume refined-fuel exports after its holiday pause. That could help supply, although shipping disruptions and depleted inventories remain obstacles.
The Energy Information Administration’s October 6 outlook helps put today’s move in perspective. It estimated Middle East production shut-ins at 4.8 million barrels a day in September, down from 5.8 million in August. Supply was recovering. Yet it still expected constrained exports and falling global inventories in the fourth quarter. Its forecast was completed October 1, so it provides context rather than confirmation of this morning’s negotiations.
For the Fly High universe, sustained fuel relief could leave more earnings after operating costs at energy-consuming businesses and the companies financed by lenders. That matters because earnings ultimately support dividends. Businesses earning money from energy production can face the opposite effect when selling prices fall. We would therefore question any claim that lower oil helps every income investment equally.
Borrowing costs are the other part of the story. In his October 8 speech, Federal Reserve Governor Christopher Waller said he expected further rate increases if economic data developed as anticipated, while allowing flexibility over timing. His illustrative discussion of three increases was not a promised policy path. Overnight oil relief alone does not settle the inflation problem or establish that refinancing will become cheaper.
Business development companies, which lend to businesses, may earn more on floating-rate loans when benchmark rates rise. Their borrowers also owe more interest, while the lenders’ own financing can become dearer. Mortgage REITs, which own mortgage-related assets, face a different balance between funding costs, asset income and changes in asset values. Commercial-property lenders need borrowers whose rents and operating earnings can carry refinancing costs. Higher asset prices would not, by themselves, establish stronger recurring earnings.
Our view improves if actual fuel deliveries recover, delivered costs fall and borrowers preserve earnings after interest. Today’s 10 a.m. Eastern preliminary Michigan consumer survey is the next scheduled check on confidence and inflation expectations. The more important follow-through will be evidence that the relief reaches business margins and debt payments.
Sources
- Reuters, October 9 oil report and 8 a.m. Eastern futures observation
- Associated Press, October 9 early market report
- EIA, October 6 global oil outlook
- Federal Reserve, Waller’s October 8 speech
- New York Fed, October economic calendar
This article is general information, not personalized investment advice. Fly High Investing may hold securities discussed in this article.