May 30th Morning Energy Report

Good morning. Bond yields are at multi-year lows indicating investors are fleeing to safety from riskier assets like stocks. Not. And there’s the conundrum. Normally, when bond yields hit lows it’s the result of investors flight to safety from risker assets such as stocks with the latter falling. It’s the old “risk on/risk off” relationship Such is not the case currently. The 10 year Treasury yield hit its lowest level since June 2013 this week and what are equities doing? Hitting new highs with the S&P 500 marking another record high yesterday climbing 10 points to 1,920. And by the way, that’s its 3rd record high in 4 sessions. The Dow and Nasdaq did nicely as well with the former adding 66 to 16,699 and the latter popping 23 to 4,248. Traders shrugged off data showing Q1 GDP was worse than expected (it actually contacted 1% which was the first contraction in 3 years) although jobless claims came in better than anticipated with the latter being the lowest in years. The four week moving average of claims, which is widely followed as it “smooths the curve,” was the lowest since August 2007. Investors didn’t put much stock in the bad Q1 GDP data because it reflected 1) the extremely cold weather that plagued that time frame and 2) Q2 GDP forecasts. Get this. Citi analysts are forecasting Q2 GDP at a whopping 4% and Goldman Sachs isn’t far behind raising its estimate to 3.9%. That’s strong my friends!

So why is the anomaly of both stocks and bonds being well bid? The answer is there’s a glut of global liquidity. There’s so much money in circulation looking for a home it’s pushing both assets higher. And as low as bonds yields are here in the U.S. they’re still better than in a lot of the world. Spanish yields are 2.8%, and the yields in the United Kingdom, Canada and Germany are all lower in the U.S. with the latter being a meager 1.35%. And even more liquidity is expected to come to the market by the ECB next week! So there you have it. Money, money everywhere. Now what the longer term ramifications are with every developed nation in the world forcing liquidity into their markets is most definitely good fodder for happy hour.

This morning is starting out quietly around the world with both the Asian and European stocks mixed and U.S. stock futures trading marginally lower (-20 basis Dow). Chatter. Did you hold on to your Apple stock? It’s up 20% in three months to $630, the highest level since the fall of 2012 when the stock hit its all-time high of $70.07. In other news, Shelly Sterling sold the LA Clippers to ex-Microsoft CEO Steve Ballmer for a sweet $2 billion (yes with a “b”!). Putting this in perspective for you, the Milwaukee Bucks were sold just two months ago for $550 million.

After rising 21.4¢ the last two days natty retreated 5.6¢ yesterday settling at $4.559. The EIA released its weekly natural gas storage report showing the U.S. injected 114 Bcf last week. This was materially greater than the 107 Bcf expected and that’s why the market sold off. We are making a dent in the storage deficit with the U.S. now 35% below last year and 40% below the 5 year average. Those numbers were closer to 50% at the beginning of April. With the “meat” of the summer still ahead of us and storage levels so low it’s going to take more storage numbers like we saw yesterday to reduce the price “fear premium” currently in the natty price. The bulls have been waiting for that first big heat wave forecast to hit, but they’re not getting it today (see below) with the forecast very benign in the 6-15 day time frame. This morning natty is down 3.2¢ to $4.527 once again gravitating to that $4.50 number where it’s spent the last 3 weeks pivoting around.

WTI bounced back yesterday gaining 86¢ closing at $103.58 with Brent adding 16¢ to $109.97. The DOE released its weekly crude and products report yesterday and it was uneventful with the aggregate falling 0.34 million barrels with a small increase expected. Something very interesting is taking shape on the WTI continuation chart. WTI has three times in 2014 (beginning of March, mid-April and late May) failed after hitting $105/bbl with prices dropping thereafter. In technical terms, the $105 level is called “strong resistance.” Now since the last day of April through yesterday WTI prices have been slowly moving higher with both the daily highs and lows getting higher developing a pennant formation. Bottom line is WTI is once again attacking the $105 level. There is an old trading aphorism that double tops hold but triple tops fold. The way the chart is shaping up we’ll see if $105 holds in June or if we’re off to higher WTI prices.

Easy come. Easy go. At least for the huge reserves associated with the Monterey Shale formation in California. Whereas the EIA had previously pegged the recoverable resource at 13.7 billion barrels it has revised that number to a mere 600 million barrels, a reduction of a whopping 96%. Why? Because of fracking, or more specifically the belief oil and gas companies will not get the state permits to frack. California is home to an enormous and powerful agricultural industry and with the Monterey Shale located beneath the fertile Central Valley fracking is going to compete with agriculture, ranching and other commercial and residential users for water. With 100% of California now in a state of severe drought critics of fracking have gained traction in the debate over the extent to which government should allow oil and gas companies to move in. Now the good news is the reserve numbers could rapidly change if drillers could improve technology to access and frack the Monterey. After all, no one saw the shale revolution coming just a few short years ago. And I believe we’ll find a way to get that oil and gas. One stock I’ll never short is American ingenuity and technology. Have a good weekend and remember to aspire to inspire before you expire! Have a good weekend.