Good morning. U.S. stocks fell from their record highs yesterday with the Dow falling 101 points. 0.61%, to 16,614, the S&P losing 9, 0.47%, to 1,889 and the Nasdaq once again leading all the indexes lower down 30 points, 0.72%, to 4,101. To refresh your memory, the S&P is coming off three straight daily advances marking record closing highs for the last two sessions. On Tuesday it climbed above 1,900 for the first time. The Dow ended at record highs for the three previous sessions. Keep an eye on the following. The Russell 2000 index of small cap stocks dropped 1.6% underperforming the S&P and extending a divergence that has been pronounced throughout 2014. At its session low last Friday the Russell was down exactly 10% form the intraday high set in early March. There is talk that this divergence is a bearish sign for the market in general. However, there’s no question that over the last few months there has been a major rotation from the momentum, internet, biotech and small growth stocks to defensive stocks and the latter exist in the Dow and S&P.
Regarding economic data, for the first time in it seems like forever, U.S. data from the Labor Department yesterday showed potential signs inflation pressures may be creeping up. Producer prices rose 0.6% In April recording their largest increase in 1½ years as food prices surged. Estimates were for a 0.2% gain. For the 12 month period ending April the PPI rose 2.1%, the largest increase in 2 ½ years. Core PPI, which excludes volatile categories such as food, energy and trade services rose much more moderately up 0.2%.
This morning the Labor Department just released its weekly report on new claims for unemployment benefits and its looks good. Initial claims declined 24,000 to a seasonally adjusted 297,000. This was the lowest level since May 2007 and brought claims back to their pre-recession level. Additionally and on the positive side this was better than economists had forecast. However, the stock market doesn’t seem to care for the Dow is down 79 points. Although unemployment claims may actually be supporting the market from going lower for all the European markets are all trading lower.
The Labor Department just released the Consumer Price index for April showing a 0.3% increase which is the biggest rise since June 2013 and added to March’s 0.2% rise. For the 12 months through April consumer prices rose 2.0% after gaining 1.5% in March. That was the biggest increase since July 2013. The Federal Reserve targets 2% inflation and it tracks an index that is running even lower than the CPI. Policymakers worry that inflation is running too low, but the steady increase in prices should ease those concerns.
Natural gas chopped around yesterday in a tight 5.5¢ range ending the quiet day down 0.9¢ at $4.367. However, the back of the curve (cal 2015 and ’16) did rise 2-3¢. Today is Thursday which means its EIA storage report day. The market is expecting an injection of 96 Bcf. Last year we saw a 98 Bcf injection and the 5 year average is 82 Bcf. Regarding the weather, the Houston area set or tied record low temperatures last night. Do you know what that means? Absolutely beautiful weather! I know some heaters are kicking on for a few minutes in the Midwest right now with the below normal temperatures. How do I know this? Because in doing my research I noted imports of Canadian gas into the Midwest are up some. Looking at the maps below, there is going to be almost no load (no CDD’s or HDD’s) in the entire U.S in the 6-15 day time frame. The southeast will have some A/C units kick on but Texas and the Southwest will be quite nice.
This morning traders are waiting for the storage report with natty doing nothing being down a 2¢.
Yesterday the DOE released its weekly crude and products report showing crude stocks rose back toward record highs last week while gasoline and distillate (mostly diesel) fell as refineries cut output and crude production jumped. In aggregate, inventories rose 947,000 barrels compared with expectations of a decline of 100,000 barrels, as production hit a 28 year high of 8.43 million bpd last week. The crude stock build was driven by a rise in stocks in the Gulf Coast hitting a record high of 215.7 million barrels. WTI immediately fell 30¢ but reversed course to close up 67¢ at $102.37 once traders realized that inventories around Cushing, OK, the Nymex futures contract delivery point, fell 592,000 barrels.
Brent rose 95¢ yesterday closing at $110.19 driven higher after OPEC announced production fell below 30 million bpd in April. This is down from 32 million bpd back in mid-2012 and down from just over 31 million bpd back in the summer of 2013. The cartel’s secretary stated OPEC has adjusted production as non-OPEC production has risen. It is worth noting that over the course of the past 5 years U.S. production has leapt from cost to 5.0 million bpd to current levels just above 8.0 million bpd. Don’t you just love it?!
This morning WTI is easing off being down 61¢ I’m sure on weaker equities.
There’s a lot of discussion here in the U.S. regarding coal and specifically how coal fired electric generation plants are being decommissioned. Well the opposite is happening in China. Per the EIA, Chinese production and consumption of coal increased for the 13th consecutive year in 2012. China is by far the world’s largest producer and consumer of coal accounting for 46% of global coal production and 49% of global coal consumption-almost as must as the rest of the world combined! China’s coal consumption is fueling its economic growth. China’s GDP grew 7.7% in 2012 following a growth rate of 10% from 2000 to 2011. China is the world’s number one producer of coal producing nearly four times as much as the world’s second largest producer, the U.S. And get this. China’s coal consumption increased by more than 2.3 billion tons over the past 10 years accounting for 83% of the global increase in coal consumption. As I tend to say “That’s material.”
Have a good day.
Sr. Energy Advisor