Equities and the Economy:

U.S equities activity was muted yesterday awaiting both the conclusion of the Bank of Japan’s monetary meeting and the FOMC meeting today. The Dow rose 10 points to 18,130, the S&P 500 rose 1 to 2,140 and the Nasdaq finished up 6 points to 5,241. Chatter. Getting right to it, overnight the BOJ concluded its meeting leaving the discount rate at minus 0.1% (yes negative) and will continue its own form of QE by buying Japanese government securities at the pace of 80 trillion yen per year until inflation reaches 2% (no change). The bank has got a lot of work to do. Deflation has been the order of the day in Japan for at least a decade, and that hasn’t changed over the past year or so. The Asian markets responded positively to the meeting with all the major indexes ending positive, particularly Japan’s Nikkei which closed up a hefty 1.91%. The reason for the equity gains was 1) the bank signaled it was continuing its commitment to QE and 2) the bank didn’t adopt deeper negative interest rates which the market was fearing.

European investors liked the news from Japan and the major indexes are trading about ½% higher and this is rippling across “the pond” to the U.S. with the Dow up 84 points. More important is the results of today’s FOMC meeting. There’s only about a 20% chance of the Fed announcing an interest rate increase, however, various Fed officials have been making public their opinion on when interest rates should be raised so what is probably most important is Janet Yellen’s press conference and the “signal” she sends to the market.

Fundamentally, the only report out yesterday was Housing Starts for August which, sparing you the numbers, came out disappointing but the data is still near post-recession highs.

Oil

Oil prices ended little changed yesterday with WTI closing 14¢ higher at $43.44 while Brent slipped 7¢ settling at $45.88. Complete chatter. Let’s move on to today for WTI is up 85¢ and there’s no doubt what the driver is, last evening’s API report. Setting the stage, traders were looking for a 1.5 million barrel decline in crude inventories for last week. The actual number: 7.5 million barrel decline. That’s what you call a bullish report amigos.

The jawboning continues at OPEC with the Algerian energy minister saying OPEC could turn next week’s informal talks into an extraordinary meeting to discuss stabilizing the markets. However, the fundamentals are not bullish of prices (that doesn’t mean we couldn’t hit $50!). Saudi Arabia reported its exports rose to record levels in July rising by 166,000 bpd m-o-m to 7.622 million bpd and up 312,000 barrels y-o-y. July’s exports are the highest since 2002. Additionally, the Kurds announced they’ve loaded a tanker of crude and it’s leaving from the Turkish port of Ceyhan. This is their first exports in a year.

Courtesy of MDA Information Systems LLC

Natural Gas

It’s Pamplona in the natural gas market! Natural gas prices continue their march higher with the October Nymex contract settling a material 11.3¢ higher yesterday at $3.047. This is the first time the prompt month has settled over $3.00 in 16 months. The bull run began last week when the cash market broke $3.00 driven by continued strong burns in the power sector and exports (Mexico and LNG) and yesterday the day cash market posted double digit gains. U.S. dry production has been flat for the past year but demand has been increasing. $3.00 is a nice price for gas and we’ll have to see if producers start drilling more, which we’ll see through the rig count.

One of the statistics I monitor is the number of drilled but uncompleted (DUC) wells. This is de facto storage. The number of DUCs is materially dropping. The number of DUCs peaked in November of last year at 2,429 and that number is down 1,000 since then. Interpretation: bullish

As mentioned above, the big question is if and when producers respond to the higher prices. A whole lot of producers, particularly the independents, are still saddled with debt and are trying to get their balance sheets in order. The independents are really important here because the marginal gas production is from shale formations and it is the U.S. independent producer who is drilling in the shale. The major producers have not made significant inroads into producing shale oil and gas This morning natty flat to yesterday’s close.

Elsewhere

Japan’s nuclear industry continues to struggle. Prior to the Fukushima disaster in March 2011 there were 54 nuclear reactors on-line in the country. Today, over 6 years later, only 3 have been returned to service. Two additional reactors have received approval to restart and 21 others have file applications for restart. Although some reactors have met Japan’s Nuclear Regulation Authority safety standards and have been approved to restart, both legal and political opposition continues. LNG imports have ramped up to replace the lost nuclear generation.