Oil Surge Pushes Wall Street to Record Highs

A string of strong corporate reports and a four percent surge in oil prices following comments from the Saudi oil minister – alongside forecasts for a tighter crude market in coming months – led stocks in both the United States and Europe to strong gains. Major U.S. stock indexes closed on Thursday with record highs following the release of U.S. labor data reporting a drop in jobless claims. Among them, the S&P energy sector led the way as the best-performing major S&P group, bolstered by 1.3 percent following the recent rise in oil prices.

"Energy is such a common denominator for all economies that the sort of move that we're seeing there has to be of reassurance," Bruce McCain, chief investment strategist at Key Private Bank, told Reuters. "A week or so ago oil seemed to be tumbling again, and now we've come back to a level where it seems to be stabilizing."

All told, the Dow Jones industrial average jumped 117.86 points, or 0.64 percent, to 18,613.52 on Thursday afternoon. The S&P 500 gained 10.3 points, or 0.47 percent, to 2,185.79. The Nasdaq Composite rounded out the record-breaking day with the addition of 23.81 points, or 0.46 percent, to 5,228.40.

Thursday's gains were, in large part, attributed to the forecast stabilization of oil prices. The Saudi oil minister issued comments about the possibility of future action to stabilize prices, while the International Energy Agency forecast a tightening of crude markets in the back half of 2016. Saudi Energy Minister Khalid al-Falih added that OPEC members, as well as non-members, will look to discuss the current market conditions, including any possible moves to stabilize prices, during an informal meeting scheduled to take place beginning September 26 in Algeria.

These comments were enough to push U.S. crude CLc1 to $43.49 per barrel on Thursday, an increase of 4.3 percent. Brent crude LCOc1 closed up 4.5 percent, or $1.99, at $46.04 per barrel. Both surged by more than five percent during the trading session before settling toward market close.

Outside of the energy sector, comments from a Federal Reserve official claiming that the central bank should raise interest rates further this year impacted currency and bond markets. San Francisco Fed President John Williams made the comments in an interview with the Washington Post, citing improved labor market conditions and the likelihood of higher inflation. The result was a 0.3 percent rise for the U.S. dollar against a basket of six major currencies. Although Williams is not a voter on this year's policy-setting panel, his views are seen as reflecting those of Fed Chair Janet Yellen.

Saudi Arabia, Iran Continue to Pump at High Levels

Despite the Saudi Energy Minister's recent comments about possible moves to stabilize oil prices, Saudi Arabia continues to pump record amounts of oil. Likewise, Iran is resuming production at an accelerated rate. Analysts suggest that this production doesn't bode well for a possible OPEC deal to control production following next month's meeting in Algeria. Saudi Arabia's production was measured at a record 10.67 million barrels a day in July.

"I'm skeptical that we're going to see anything out of OPEC. I don't see anything out of Saudi. Their silence is rather telling," Greg Priddy, director of global with Eurasia Group, told CNBC.

As the largest OPEC exporter, Saudi Arabia would need to be part of any potential plan to change the OPEC strategy in order to let the market set prices. That requirement was adopted by OPEC in November 2014, just ahead of a major downdraft in prices. Still, some analysts insist that OPEC is actively attempting to boost oil prices through its talks of the September meeting. The result of these efforts seems to have been an oversell, leading crude to what may be a new bottom. West Texas Intermediate crude futures briefly dipped below $40 a barrel just last week.

Saudi Arabia and Iran were at the center of the disagreement that spelled the end of OPEC efforts to freeze production last April, and the two countries are expected to play a key role in any future deal. Saudi Arabia has already said that it will not agree to any limitation on production unless all producers agree, while Iran has refused any limitations since its sanctions were lifted. Iran's current production is estimated at 3.85 million barrels a day, according to wire reports, a level that the U.S. Energy Information Administration previously estimated wouldn't be reached until next year.

One OPEC nation firmly in favor of measures to boost oil prices is Venezuela. President Nicolas Maduro recently reached out to the Saudi king about implementing measures, and he's said to be in ongoing talks with other heads of state of producing nations. The downturn in prices has led Venezuela into disarray, both politically and economically. As a result, Maduro is aiming to convince OPEC to try to return oil prices to the $70 per barrel level.

Pressure could reach a boiling point ahead of the September meeting. While analysts expect oil to head higher after the end of U.S. refining maintenance, a drop is expected in the interim. According to John Kilduff, a partner with Again Capital, key technical numbers point to prices near $35 per barrel, and the trough is expected to come right around the time of OPEC's informal meeting.

U.S. Labor Market Strengthens

The number of Americans filing for unemployment benefits once again dropped last week, an indication of labor market strength in early August that could lead to faster economic growth. Additional data showed a surprise rise in import prices for July, the result of the drop in petroleum prices being offset by gains in the cost of other goods. Despite this, the resurgent dollar is expected to continue curbing underlying inflation in the months to come.

"The data remain consistent with a still-strong trend in employment growth, which means the backdrop for consumer spending remains favorable," Jim O'Sullivan, chief U.S. economist at High Frequency Economics, told Reuters.

New claims for state unemployment benefits fell by 1,000 to a seasonally-adjusted total of 266,000 for the week ended August 6, according to the Labor Department. This marked the 75th consecutive week that claims have come in below the 300,000 threshold, the longest such streak since 1973. The four-week average of claim, which better measures labor market trends, rose by 3,000 to 262,750 following last week's results. A Wednesday report added to the sunny outlook by showing layoffs have fallen to a near two-year low as of June. As the labor market continues to approach full employment, further declines in unemployment claims are expected to be minimal or nonexistent.

In another report, the Labor Department stated that import prices were up 0.1 percent last month following a 0.6 percent increase in June. In the 12 months through July, import prices fell just 3.7 percent, the smallest annual decrease since November 2014, after recording a decrease of 4.7 percent in the 12 months through June. Last month's increase in import prices came in the face of a 0.6 percent rise in the dollar against the currencies of the U.S.'s primary trading partners.

A strong dollar and cheap oil are expected to combine to dampen imported inflation pressures in the months to come. This means that surpassing the Fed's two percent target seems unlikely in the near term. As a result, it seems that the U.S. central bank is unlikely to raise interest rates anytime soon, despite the labor market's climb toward full employment. The economy added 547,000 jobs in June and July, and the low number of unemployment claims for July suggests continued job growth in early August.

Retail Earnings Highlight Changing Tide

The state of the traditional American department store took a hit when Macy's announced on Thursday plans to close 100 of its stores next year. As shopping and spending patterns continue their dramatic shifts, retailers are struggling to adopt new strategies capable of reaching shoppers who are less inclined to visit physical stores.

Luxury brands such as Coach, Michal Kors and Fossil are taking similar measures, with each announcing reductions to wholesale distribution in an effort to combat what they feel is an overly promotional environment. Coach, for example, said Tuesday that it will close 25 percent of its locations within department stores in North America following reports that sales in these locations declined in the mid-teens in the fourth quarter. Luxury brands depend on a sort off brand cachet to survive, meaning that they need to make products less available while relieving the pressure to discount that often goes hand-in-hand with the tried-and-true department store formula.

Throw in the ease with which consumers can shop online, and retailers are in a tough spot. While the overwhelming majority of purchases still take place in stores, shoppers are visiting far less often than they once did. As Simeon Siegel, research analyst with Nomura, told USA Today, "The internet means shoppers need to go to malls less."

The numbers support this hypothesis. Online sales have more than doubled since 2009, according to eMarketer, growing from $145.8 billion to $343 billion last year. Meanwhile, retail mainstays such as Macy's, Sears, Kmart and Ralph Lauren have announced store closures in an effort to implement a leaner business model in markets where fewer stores are required to reach customers.

Still, it's too soon to throw in the towel for department stores. Both Macy's and Kohl's saw significant stock bumps following the release of better-than-expected earnings reports on Thursday. While brands are increasingly developing their own presence in an effort to better control relationships with customers, stores that offer a variety of brands and merchandise are still often the focal points of shopping malls. Unlike standalone stores, malls combine shopping with added benefits such as dining and entertainment, providing more incentive for customers to leave the comforts of home and visit physical locations. These experiences could play a role in the survival of physical retail stores as we've known them, but a change in strategy is likely in order.

"The average consumer now can see everything so quickly, and they can evaluate where to get it cheapest," Oliver Chen, head of Cowen and Co., told USA Today. "The whole retail paradigm has been destroyed."