Stocks Shrug Off Inflation Concerns, and How High Crude Oil Is Going 4/3/23

0:02Right now on Fast Oil Surge. OPEC Plus cutting output by over a million barrels a day. WTI and Brent spiking, energy stocks rallying, but the market greeted this news with a yawn. We'll break down this mostly muted reaction, plus tapping the brakes on Tesla. Despite the EV maker posting record EV deliveries, the stock dropping on margin fears. Do investors need to prep for more selling ahead? And later, Mickey D's hitting new highs ahead of corporate layoffs. Macy's rising after a big street upgrade and some healthy returns in the health care sector. I'm Melissa Lee. This is Fast Money. We're live at the Nasdaq Market Site.

0:34On the desk tonight, Karen Feinerman, Tim Seymour, Guy Adami and Jeff Mills. And we start off with the sharp spike in oil prices. WTI crude trading above the$81 mark at its highs today, its best level since late January. Benchmark Brent topping out above$85. A move coming after a surprise announcement from OPEC Plus on Sunday that the oil cartel could cut output, would cut output by more than a million barrels a day starting next month. Energy stocks rallying on the news. The XLE ETF rising more than 4.5%. Its biggest gain since October. where shares of Marathon, Conoco and APA leading the way.

1:07But what does all this mean for inflation? The Fed doesn't seem to be worrying about the bar market today. The Dow rising more than 325 points or about a percent. The S &P posting its highest close since February 15th. Both indices up for four straight days. The Nasdaq, meantime, finished the day in the red but ended well off the lows of the session. So why were markets able to seemingly shrug off this inflationary news? Tim, what do you think? Well, I think when OPEC makes a move like this, and I think the headlines appear very political. I'm psyched we've got Paul Sankey on because he really understands the politics behind oil in addition to the fundamentals.

1:41But when I see the dollar give ground and I see an ISM that was one of the lowest prints we've had in anybody's lifetime at any time. And so, you know, forget two bad months during COVID, which were extreme. We're back to 2009 levels. It tells me that people aren't that worried about inflation. And in fact, if I look at the bond market and I look at the 10 year and the two year, we're near kind of those lows. I mean, we're not that far off of even some of those extreme lows. And meanwhile, equities. I don't know if I'm whistling past the graveyard. And but I, you know, eight percent move off of those March 13 lows to the intraday high today.

2:13So so it tells you that people are not worried about a more aggressive Fed. And if anything, again, I think the dollar represents central bank differentials. People right now are pricing in much less Fed than they might even be pricing in ECB. So I don't think there's a lot to this oil move, but I don't think this is something that signals more inflation ahead. The politics of it, meaning they want to snub the noses, their noses at the West. They want to I mean, like, what is this? Because if it's not going to impact inflation, then what is the what is a political sort of fallout here? If it's not going to impact what the Fed is doing as consumers, the politics of the are that Saudi and Russia are a million of the of the million six.

2:50and you could make an argument what's going on there. And in fact, if you think that Russia is trying to do everything they can to get product to the market and they're doing different ways to do it, they're not going to do it through the headline. They're going to do it through product and product have gotten very expensive. Yeah. And it's more money for them. Yes. Right. Yes. There's that. The war in Ukraine. Yeah. And for Saudi Arabia as well. Welcome back, by the way. Yes. I forgot. I know. It's good to be. Please. Can you welcome her back? Very great. Very great to have you. I agree with Tim.

3:19I thought that data was really more important. It sort of trumped this oil data. I think that it's sort of pretty deflationary on its own. But if you think about that's March data, it doesn't even really capture what could be happening now as a result of the bank situation. Tighter credit, et cetera. Tighter credit, all of that. And so it sort of makes you think, all right, well, this inflation thing is really starting to turn over. Therefore, the Fed will be done sooner, or perhaps even turn around. Yeah. So happy days are here again, Guy. Everything's coming up roses. Hi, Mel. Hi, Guy. Missed you.

3:59That's true. Everything's coming. Absolutely. Everything's coming up roses. I mean, the worst ISM in a generation. What could possibly go wrong? And Tim is right to flag that. And it was a tragedy of a number. But it speaks to that lag effect that we've talked in. It's starting to kick in now in terms of Fed rate hikes and all that liquidity finally making its way through the system. And yeah, maybe the inflation battle is over in terms of hikes, but it doesn't mean the effects of what the Federal Reserve has done isn't going to continue to be felt. And, you know, that might be great on the surface because the Fed's out of the picture, but things are slowing down precipitously.

4:37So earnings, by definition, should slow down. I think the market is hoping for a Fed to backtrack, potentially cut in the back half of this year, which, by the way, is coming up faster than any of us realize. But on the flip side, the inflationary inputs, and we're going to talk about oil with Paul Sankey. I mean, gasoline prices are slowly back on the rise and their inflation in all the wrong places, to quote that song by, what was that cat's name, Garth Brooks or somebody like that, who's a fan of the show, by the way. I'm sure he's watching right now, in fact. Hello, Garth. Welcome. But with all this said, Jeff, I mean, it sounds like from what all of you are saying in terms of the picture of the economy and the slowdown that is, you know, in the midst of happening is still yet to come in terms of the full effect, that we could actually see oil prices stay the same, maybe even come off a little bit despite this cut.

5:26Yeah, I think at the very least oil prices are probably stable here. We were talking about energy a little bit on Friday and I alluded to that. And now I think that even underscores that point. So say you get stable oil prices from here. We've already seen EPS revised lower for a lot of the energy names. Most of that was due to lower oil prices. I think a lot of the forecasts you're seeing, I mean, not that Goldman Sachs is the end all be all, but they're looking at potentially$95 a barrel here. So let's say we end up right around where we are today. Energy is the cheapest sector on an absolute, on a relative basis.

6:02I mean, I think that's a pretty good setup here for a sector that's seen really flat valuations for the year when the rest of the market has moved precipitously higher on a PE basis. So I would not be abandoning the sector, even if we were to assume that the economic picture isn't that great. So maybe oil prices stay where they are. There's kind of a net effect here. But if you look at a lot of names, I talked about EOG on Friday holding above that 120 level. That's important. We're right there now. ExxonMobil, Schlumberger, testing those 200-day moving averages, holding nicely. I just think this provides more momentum.

6:33I do think we're going to see a rotation back to some of last year's losers, or excuse me, some of last year's winners that have been losers for the first part of this year. So I think that's the setup here as we go into the second quarter. Yeah, I mean, if the cut provides some sort of a backstop or floor to oil prices, that's certainly a good thing one would hope. If you're an investor in oil, as you are, Tim, oil stocks, that's a good thing. It is a good thing. It's something that if you don't believe that the energy companies can resist temptation in terms of their ability to drill and drill more, I mean, this signals that longer duration oil products are the ones that actually are going to do best here.

7:08If you put a floor of some kind under oil, and I don't know where that is, especially as I signaled that maybe this could also be fear of demand. And that's why they move, not the politics. But I totally agree with Jeff. I like energy here. I think energy stocks are always cheap. So you've got to be careful about that. Valuation doesn't really mean a whole lot. In fact, if anything, sometimes as they go up and waiting in an index, they kind of pull down the index with them. But I do think that this is about those companies that have some kind of reasonable long-term project management. ConocoPhillips, Chevron, even Exxon.

7:43Those are the places I think benefit today. Well, we had before, you know, in a time when money was cheap and you can basically fund exploration or at least making old wells more efficient or finding ways to tap old wells. That doesn't exist anymore in terms of that cheap money. So that also provides some sort of a backstop. Nor does that willingness to drill as much. Right. One thing to talk about is how disciplined they are now. It's sort of not your father's oil companies anymore. And they've been the beneficiaries of that. Sometimes the stocks haven't, but the balance sheets certainly have.

8:15The debt has. And, I mean, the valuation, they give a lot of money back to the shareholders as well. Yeah, yeah. Gas prices tick up, though, and all those oil companies that are so disciplined now, disciplined, i.e., not drilling more in helping the U.S. consumer guy, puts them again into the crosshairs of the Biden administration. they're going to spend money on buybacks and dividends for investors. How horrible. Well, I mean, listen, I mean, Chevron, when he announced that$75 billion stock back, there was also the peak in the stock back in November, I think. The stock sold off from then, climbing back now.

8:49But, yeah, how horrible, I get it. But, listen, in terms of the administration, I hope they took that window of opportunity when crude was trading around that 65, that Steve Grosso level, to at least try to get something back. But apparently they're unable to, I think, vis-a-vis the whole debt limit thing that they can't get around. So they don't have any money to buy it back. And crude is going to trade in their face, unfortunately. OPEC did what they did. They're not our friends. I think we all agree. But I think these stocks at$75 crude were too cheap. And the higher crude goes, I think, almost by definition, the cheaper they get.

9:25So Marathon Petroleum, MPC, by the way, a name that Paul Sankey gave us a couple of Octobers ago and it was a$60 stock. That made an all-time high today. OIH pushed up towards$300. Oxy, which is one of the O's in Mojo, as you know, which O it is doesn't necessarily matter. But, you know, that's$65 and seemingly breaking out and clearly Warren Buffett's onto something. So I still think you stay with the energy space here, Milms. I always thought it was the first one. Now you're telling me it doesn't matter? I mean, after all this time, come on, guy. It's not the O and Don either. Why did the NASDAQ go down then, Jeff?

10:02I mean, if all of this is to say that the Fed is closer to done and that's what everything points to, then why was that the index that was lower today, do you think? Yeah, that was a bit of a head-scratcher to me, honestly, because I think ultimately that is going to be the place where investors look to hide out, at least to some degree. I mean, I think you have to delineate, and we've talked about this before, between some of those companies that are profitable and have free cash flow and that don't. But I do think ultimately that gross stocks in general are going to trade better than a lot of people anticipate.

10:31Because if we are closer to the end of that rate hiking cycle, if the economy is actually slowing down, earnings growth is going to continue to slow. Guy mentioned that. I mean, look at expectations out in 2024. I think it's for$240-some a share. That's assuming 10%, 12 % growth next year. I just don't think that that's the reality, given where we are from a macroeconomic standpoint. And so, sure, we had a little bit of an off day today. Growth has had a run. The Nasdaq has had a run, so it pulls back a little bit. But I think people are going to be surprised to see some of those names hold up a lot better as we move through the next few quarters.

11:02Karen? Yeah, I just think, I mean, that run up from March 10th to where it closed on Friday, it was up about 11 percent, which is an enormous move. So I think, I mean, this is just not a big give back, actually. I shorted some cues at the end of the day Friday, just thinking, oh, it's a quarter end thing. And it was kind of a melt up. And I was actually expecting a lot more reaction today. And it was very muted. It held in pretty well. For more on OPEC plus a surprise cut, let's bring in Paul Sankey of Sankey Research. He was ranked by institutional investors number one for independent energy research in 2023.

11:37Paul, great to have you with us. Hi. Way back when, I think it was at the end of last year, you predicted oil to 120. sometime this year, I believe it was. Do you stick by that? I mean, is that even more likely? Does it go even higher? No, that call went wrong, quite frankly. That was because we anticipated more winter in Europe and we anticipated a lot less oil from Russia. So I think we're looking towards more of 100 now. It was a driving season call. So the idea was that by Memorial Day, we would get to 120. That's far too high, I think, now based on the economic weakness that you guys have been highlighting with the ISM number today.

12:17So I think 100. Saudi, the key thing here is Saudi wants higher prices. And they've basically said 95 is what they aspire to. They haven't specifically said that, but that's what we're kind of led to understand. So I think that would be the next target, definitely. 95 seems like a long ways to go from here if we are to believe that, you know, there is a push lower by economic slowdown. I mean, it almost seems like more cuts are on the table and likely to come if 95 is the price that they actually want. Yeah, but the I mean, you have the natural rise in demand here because of seasonality. So you go into driving season in the U.S.

12:58You also have a lot of refineries to come back online. They're going to suck up more crude. So the crude market will be tightening naturally seasonally. And then And you've got to remember that the global demand drivers are less economically impacted by the U.S. nowadays. That's really part of the multipolarity world that we're living in. And so China, for example, is coming off a structural COVID low, more air travel. That's not going to be too economically sensitive. India is doing great. I was actually looking at Brazil demand numbers, and they're strong. And what's interesting, particularly in the case of India and Brazil, for example, is both of them are having all-time record oil prices in local currencies.

13:37So the demand strength globally seems like it's still there, and that'll be what drives us home. Hey, Paul, congrats on the award. I guess the other thing I'd just ask is, does today's announcement do anything to how we should be investing in oil companies? Is this going to change their attitude, their behavior? What does this headline mean to investing in the energy sector? That's rallied back, but still people are questioning where demand is. Yeah, I mean, the first principle is demand. But at the same time, we had talked about two puts, again, somewhat wrongly. The first put was the Saudi put.

14:09And that's them essentially here managing to keep a secret, actually, OPEC. They stunned the journalists whose job it is to find out about these things. I'm amazed. You never normally get an OPEC deal like this that's such a total secret. But obviously, the Saudi put. But the second put was the Biden administration's theoretical put that they would start rebuilding, as you referenced, the SBR, once we got down to 70. And they simply didn't. And that, of course, adds to the kind of negative perception. But now that the Saudi puts kicked in, I think that you do have a better valuation support for the names, which, as you say, have got very cheap.

14:46We thought that when oil was last at 85, they were discounting about 85. But then you had the airdrop in oil as a result of the banking crisis. And I think with very low speculative interest, essentially high short interest in oil, very few longs, the Saudis decided to step in and squeeze the market back to where they want it. And it's very much for their own reasons. You know, it's for domestic spending reasons that they want this higher price. So, Paul, in this environment, where are you better off being? The legacy integrated names, refiners, the levered names or names within the OIH? How would you sort of layer into that group?

15:26This is a tough headline for refiners, right, because you're squeezing the crude market higher, which obviously squeezes their margins. and the refiners have been significant outperformers in the energy space. So we would say it's relatively negative refiners here. The one that people want to buy, quite rightly, is service companies. That's the most juice, particularly international service, names like Slumberger, Baker Hughes, but also some of the domestic service names. Because you've got to remember that whilst typically an OPEC cut is seen as bearish because it increases spare capacity, global oil production capacity really has a problem.

15:59And we really only have growth in Guyana outside of OPEC Plus and almost nothing else to speak of. So structurally, the market to me looks like it'll be a hundred dollar market in the future simply by lack of supply growth. And then amongst the names, obviously, by the juiciest EMP, as you mentioned, Oxy. And then as you go down the capital structure, the smaller names obviously will do better. So it looks good for U.S. EMP companies. We always ask you about a pairs trade, Paul. And so I'm curious what you would put on, what you'd be looking at now, given, you know, we sort of have like this floor under oil prices a little bit, you know, and we've got a NASDAQ that's been up 11 percent over the past month or so.

16:40I mean, anything new to tell us? These are always notional, right? So I think we'll shorten video and we could go long Oxy. Let's say Oxy. Shorten video, long Oxy. All right. It's a good one. Yeah. All right, Paul. Always good to see you. Thanks. Pleasure. Thanks. Paul Sankey, Sankey Research. Guy's laughing. Do you not like that trade? No, I love that. Listen, you know what I think of Paul. First of all, it's better to be number one than number two, and he's number one. Second of all, I mean, he's done this like three times, and he's been spot on every time. So don't fade Paul Sankey. I'm with him 100%.

17:20Jeff? Yeah, I'm with him too. in the sense that you mentioned the NASDAQ earlier, you've had some of these names that have had huge runs. We talked about semis a couple of weeks ago. NVIDIA is one of those names. So I wouldn't be surprised for some air to come out of that balloon. And like I said, I do like the energy space here. I think between some of the positioning, Paul mentioned positioning. If you look at the way CTAs, so basically oil speculators are positioned, they were pretty short coming into this. So I think you could actually see an exacerbated move higher because of that positioning.

17:52And as Tim said, you know, you probably get little response from U.S. shale. So I think you have support there. And the valuations, I think, are attractive. So you let a little bit of air come out of the moves you see in the NASDAQ. I think you see a rotation to some of these names over the next couple of weeks. I like it. I'm a Sankey Pairs Trades disciple as well. And I was early on that NVIDIA short around 235. And, you know, I should have waited for Paul. I knew how I know he was coming on the show. But I do think that we have a backdrop where special oil services, you can see the investments.

18:24You can see what was already starting to happen, the outperformance of OIH, even in the difficult tape we had. Are tech multiples too high here? Yes, they are. But until they stop outperforming the market, they're going to go higher. You're sticking with your cues short. I am. I do love Paul's trade. I mean, he comes on and he always has these sort of, you know, buy disappointment and short excitement. Yeah, that's a good way of looking at it. And they converge often. Interesting. Coming up, Tesla's electric slide. The EV maker dropping after reporting production delivery numbers. So what had investors unplugging from this one?

19:01The details ahead. Plus, a retail revival. Shares of Macy's ripping higher as analysts get bullish. What they see ahead for the stock when Fast Money returns.

19:20Welcome back to Fast Money. Shares of Tesla tapping the brakes today, falling 6 % as delivery numbers came in at the lower end of estimates. But still at record levels, the relative softness prompting analysts to predict more price cuts and a squeeze on profit margins. Despite today's pullback, shares still up nearly 60 % so far this year. It feels like it's not a surprise that there will be a squeeze on profit margins. And that's exactly what people thought when they announced the price cuts to begin with, Guy. So is this just about, you know, selling something that had gained? Listen, to Tesla's credit, I mean, a couple of months, maybe it's four or five months ago now, they said that their margins, which were north of, I think, 22 percent, would get more in line with the legacy automakers, which I think are probably around 16 percent.

20:03So you figure they probably have told you they're going to come in around 18, 18.5%. So I think the street should have expected that. But how do you trade the stock is really what it comes down to. March 13th, they got down to that 165 level. We bounced. We were not able to take out those recent highs for about 217. I happen to think you're in no man's land now until they report earnings in a few weeks. So I guess if it gets towards that lower end of the range, you buy it again. But right here at 195, I think you're flipping a coin in terms of trading the stock in earnings. Jeff, what do you think?

20:37It's always amazing to me how the news aligns with the technicals. And I've been looking at this 155 to 205 range, and now it's fading right at the top of that range. And when I look at the stock this year, I mean, the stock has doubled, but so is the P.E. multiple. It's gone from 22 times to 44 times. So then the question is, well, what precisely is the right multiple? And obviously, I don't know. But I think a lot of this year with a stock like Tesla has been this flight to all things growth, not just quality growth and falling interest rates. So I think when you still have a backdrop of, yes, good record deliveries, that's a check in the positive column for sure.

21:16But there's still questions about demand, I think, especially in China, given the reopening boost that maybe inflated some orders there, just the overall macro environment. I don't think the 44 times multiple holds up. So I agree with Guy. Maybe you trade it, but you wait till it gets back to the lower end of that range. I agree with the guys. I mean, I've always found it expensive. It just seems to me that this PE multiple, 45, whatever it is, is not priced for inline. Inline doesn't get it done, or even slightly less than inline really doesn't get it done. So to me, it's that simple. Yeah, well, it's priced for mass market already on some level on Model 3.

21:53and on the way. I mean, this is where it's supposed to be going. Also, you know, price cuts, I think, tend to hurt Tesla more than they hurt even the other, you know, those folks in EV land chasing them. So always, you know, to me, is about valuation now. For me, at another time, it was a balance sheet question. It was even a transparency and a compliance and a governance question. To me, it's just, there's no way to pay. It's a car company. It's a car company. There is a lot more fast money to come. Here's what's coming up next. The Detail in Retail. Analysts seeing big things in store for Macy's.

22:28So is this name worth a check out? Plus, time to get real. Why our next guest says investors should brace for a reality check. The setup ahead of earnings season next. You're watching Fast Money, live from the NASDAQ market site in Times Square. We're back right after this.

22:58Welcome back to Fast Money. Shares of Macy's topping the tape, ending the day up nearly 7.5%. This comes after J.P. Morgan upgraded the stock to overweight, citing a favorable risk-reward setup and a clear confidence in the company's fiscal year top and bottom line plan. Analysts also bumping their price target up$1.29 a share. They had set out a plan to revamp the business a few years ago, Karen, I guess it's working according to this analyst. It is working. I mean, it's it's they talk about a number of drivers. They've had a lot of store closers at closings, I think 10 percent of their store base.