Equities and the Economy

U.S. equities closed lower for the 3rd consecutive day yesterday. The Dow closed down 76, 0.43%, at 17,492, the S&P 500 lost 16, 0.76%, to 2,048 and the Nasdaq got pounded losing 1.48%, 75 points, to 5,023. As of yesterday the S&P joined the Dow in negative territory for the year. The tech heavy index was led lower by Yahoo which lost 2.7% and Apple which fell 2.6%. By the way, don’t blame the energy sector. It was the 2nd best performing sector of the S&P being up 1.3% only following the materials sector which was up 3%. If you own Dow or DuPont you partied. On the announcement of their merger each rallied 11% yesterday.

Regarding economic fundamentals, the Commerce Department yesterday reported that wholesale inventories fell 0.1% in October. Economists forecasted a 0.1% rise. Inventory levels are closely watched investors because it’s an indicator of economic activity. The implications of this last report means GDP may come in a bit lower than original estimates for Q4.

Over the last few days I’ve been discussing the technicals because we’re at important points. I mentioned we’re at both short term and long term support lines. Well yesterday they both were broken, basis S&P 500. Additionally, the index closed below the 50 and 200 day moving averages. If that wasn’t enough, yesterday’s price action was horrible. Early in the day on the coattails of higher oil prices equities rallied and the Dow was up almost 200 points, then oil prices began to roll over and equity prices gave all their gains back, and more. Now technically it’s not a classic reversal for the S&P did not close below the previous day’s low. However, it’s definitely more negative than positive. Now just because we closed below these support line does not ensure capitulation, but it is definitely not a good omen and investors will be jittery. If there’s follow through to the down side fingers will be on the mouse pushing the “sell” button on their computer monitors.

This morning Dow futures are up 47 points. Come on Santa! We need your rally!

Oil

Oil prices rallied over $1 yesterday morning on the release of the EIA’s weekly crude and products report which showed an unexpected drawdown in crude inventories, which marked the first drop after 10 consecutive weeks. However, distillate inventories, which is primarily diesel, rose more than expected, the sharpest rise since January, while demand for distillates fell to its lowest level seasonally since 1998 pushing prices lower. Another effect of the El Nino. When the bell rang to end the day WTI was down 35¢ at $37.16 and Brent was off 15¢ at $40.11. Intraday Brent tested its levels of Bottom line here folks is oil is currently in a “sell the rally” mode.

This morning is totally quiet with WTI down a meaningless 2 cents

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices had another mundane day closing 0.8¢ at $2.062. Today is EIA storage report day and the market is looking for a withdrawal of 63 Bcf. The weather is Ground Hog Day showing continued warmth across eastern half of the nation. Houston’s high today is forecasted to by 80 today and tie the record tomorrow at 82! I bet you haven’t even said “polar vortex” this year! We’re beginning the day quietly with natty down a half cent.

Elsewhere

Things are changing with our Strategic Petroleum Reserve (SPR) over the next decade. Specifically, The U.S. government will be selling a significant amount of it. Congress passed the Bipartisan Budget Act this year which authorizes the sale of 58 million barrels of the SPR between 2018 and 2025 for deficit reduction and 2017 to 2020 for SPR modernization. As part of this Act the DOE is required to complete a long term strategic review of the SPR to ensure it meets current and future energy and economic security goals and objectives. But just like a late night commercial, “that’s not all!” The Fixing America’s Surface Transportation Act authorizes the sale of 66 million barrels of oil in 2023-2025 to help support the Highway Trust Fund.

The SPR is the largest stockpile of government owned emergency crude oil in the world. It is designed to help alleviate significant disruptions in oil supplies from events such as weather, major geopolitical events, and unplanned production, transport and delivery outages. 695 million barrels, 96% of capacity, are stored in four storage sites in the Gulf Coast.

The U.S. is obligated to maintain stocks to provide at least 90 days of import protection. Based upon September levels the SPR holds 156 days of protection. On three occasions the government has tapped into the SPR. 1) was in 1991 with the commencement of Operation Desert Storm, 2) in 2005 after hurricane Katrina, and 3) June 2011 in response to supply disruptions resulting from hostilities in Libya. In addition to emergency sales, SPR oil has been released through a mechanism known as an exchange, where and entity, usually a refiner, borrows SPR oil and later replaces it with interest in-kind. Exchanges have happened 11 times. Almost all of these exchanges occurred due to hurricane events.

Ok, I get it. SPR levels are high, Congress is looking for “free money” for budget purposes and the U.S. recently until recently was producing record amounts of oil. Now we don’t know the price this oil will be sold at but I can tell you that WTI futures prices are at or below $60/bbl out into 2025. Sure would have been nice if some were sold last year in that $70 to $100 range.

On a logistical note, the Blog will not be published tomorrow for I will be out of the office. Hope you have a good weekend.