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May 23rd Morning Energy Report

Good morning. Green arrows all around yesterday with the Dow up 10 to 16,543, the S&P 500 adding 5 to 1,892 and the Nasdaq closing 23 higher at 4,154. And good news. The Russell 2000 far outperforming the other 3 indexes with a 0.93% gain. Very importantly, the Russell will begin tomorrow’s affair within 5 points of its 200 day moving average (1,118) which has proven to be a bugger to get through in recent days. Participation has been lacking throughout the week with the Memorial Day weekend on the horizon. Prior to yesterday, Monday’s volume (573 million) represented the second-lowest total of the year. Yesterday session took the checkered flag with 565 million shares changing hands at the NYSE. To use another NASCAR term, the yellow flag is still out for me. As I’ve said previously, trends are not convincing on light volume.

After a dearth of economic data for the week yesterday we got a few important reports. Weekly initial claims increased from 298,000 to 326,000 with the market expecting a reading of 305,000. In all likelihood, last week’s sharp drop was an aberration rather than a change in labor market conditions, considering levels quickly returned into the 320,000-330,000 range. Existing home sales increased a modest 1.3% to 4.65 million in April from 4.59 million in March, both seasonally adjusted. The gain ended three consecutive months of sales declines. Consensus was for existing home sales to increase to 4.66 million. The increase in sales coincided with improvements in mortgage applications and a gain in the pending home sales index. Still, sales are down 6.8% from April 2013. Sales fell 1% in the Midwest and were flat in the Northeast. Gains of 4.9% and 1.0% were seen out West and in the South. The Leading Indicators report for April increased 0.4% slightly below estimates of 0.5%. That followed a revised 1.0% increase in March. I always like revisions for the positive.

This morning the Dow is up 41 on very light volume, which will wane as the day goes on. For a change, the Asian markets all close positive and the European markets are trading on either side of unchanged. A couple of important geopolitical events are happening in Europe this weekend which are parliamentary elections across the European Union and a Sunday presidential election in Ukraine.

The EIA released its oh so, so closely watched weekly natural gas storage report showing the U.S. injected 105 Bcf last week. This was materially above the consensus of 97 Bcf and prices immediately fell like a hot knife cutting through buttah. When the day closed at 1:30 CDT the June contract settled down 11.4¢ at $4.359. This is the second consecutive week we’ve had an injection of over 100 Bcf. And next week’s will have a “1” handle as well. We’re still materially behind last year’s and the five year average inventory levels (38% and 43%, respectively) but we are making up a little ground.

This weather forecast this morning is marginally warmer in the 6-10 day time and prices are up marginally, 1.7¢. I also believe folks don’t want to go short going into the long holiday weekend for fear of a warm weather forecast Tuesday morning.

WTI dropped 33¢ yesterday closing at $103.74 and Brent fell 19¢ to $110.36. WTI prices are still feeling the effect of the anomalously large drop in inventories this week reported by the API and DOE. For the record, resistance for WTI is $106.35. I might add that the WTI technical pattern is bullish with a bullish pennant being formed with a top of $106.25 and with higher daily low prices dating back to January 2014. You can pooh-pooh the technicals all you want but traders take them seriously and do trade by them. Call it a self-fulfilling prophesy or whatever. The point is they do come into play when trading. This morning WTI is up 45¢.

Think about this when you are BBQ’ing and cooking this weekend. According to Foreign Affairs which is published by the Council on Foreign Relations, because of horizontal drilling and hydrofracturing natural gas prices in the U.S. are about 1/3 the global average. The low natural gas prices have been a godsend for the U.S. It has spurred a manufacturing renaissance with investors spending and planning hundreds of billions of dollars on new facilities such as chemical, steel and aluminum plants. The shale boom has created hundreds of thousands of new high paying, middle class jobs. Now more than one million Americans work in the oil and gas industry, an increase of 40% between 2007 and 2012. Moreover, because natural gas currently supplies about 25% of the total energy consumed in the U.S. (and growing!), the boom is saving U.S. consumer hundreds of billions of dollars.

Shale plays are not limited to the U.S. but why is it other countries do not capitalize on this readily available resource? Because only this great country has the unique ingredients necessary to fully develop shale resources including a legal system that enshrines private ownership of land and the resources below it, open capital markets and a reasonable regulatory system. As a result, nearly 4 million oil and gas wells have been drilled in the U.S. versus 1.5 million in the rest of the world. So as long as politicians don’t get in the way, the U.S. will profit handsomely from the sale revolution for decades to come. By the way, if you are thinking “So what’s my BBQ’ing have to do with shale?” Well that propane you’re burning comes from the “wet” natural gas stream at the wellhead. Prior to natural gas reaching your house it is processed into “pipeline quality” gas with valuable components, such as propane and butane, removed. Have a wonderful holiday.

Bob Shiring
Sr. Energy Advisor



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