May 19th Morning Energy Report

Good morning.  On Friday the major indexes spent much of the day meandering around unchanged but rallied in the last hour of trading with the Dow closing up 45 points ending at 16,491, the S&P 500 gaining 7 to 1,878 and the Nasdaq rose 21 to 4.091.  I really liked we had a positive day on Friday.  The stock market is trading near record highs and investors see little reason for excitement.  Add to that Wal-Mart reporting weak earnings last Thursday driving the market to its worst day in more than a month and you can see why Friday’s price action was important.  A warning sign amigos.  The yield on the 10 year Treasury note recently fell to its lowest level in a year.  Also, global money managers have raised cash holdings to a two year high.  This is a “risk off” move but I like the lack of exuberance.  The Wall of Worry.  It’s when “the world” is in, as former Fed Chairman Alan Greenspan stated, “irrational exuberance” when things can get nasty.

I always like to discuss housing because it impacts many of our balance sheets.  On Friday the government reported that builders started work on more houses in April as U.S. construction surged to its highest pace in six months.  However, and here’s the rub.  Nearly all of that increase was in new apartment buildings, a sign that Americans are still struggling to buy single family homes.

This morning Asia and Europe are dragging stocks lower here in the U.S. with Dow futures down 39.  The dollar is weaker against major currencies as expectations the Federal Reserve is in no rush to tighten policy is keeping the benchmark 10-year bond yield near last month’s six-month low.  Shanghai shares hit a 3 week lows today with the Chinese government announcing reforms to reign in “shadow” banking there.  Shadow banking is when non-bank financial firms operate like banks.

After rallying 10.2¢ on Thursday after the EIA natural gas storage report was released natty gave about half of that back on Friday closing down 5.6¢ at $4.413.  Friday’s benign weather forecast and a weak cash market pushed it lower.  This morning we come in and as you can see below, things are warming up in the 11-15 day time frame both in the west, which continues to be quite warm, and the east.  Traders are playing it from the long side today with the June contract up 7.1¢ as I write.  We’re trading right around the $4.50 level which was a “big” number a few months ago.

Oil rallied on Friday with WTI closing at $102.02, up 52¢ and Brent adding 66¢ to $109.75.  Oil’s, particularly Brent, risk premium is increasing on reports of an attack by a tribe on the parliament building in Tripoli and increased tribal fighting that according to the Libyan Health Ministry left at least 70 soldiers and civilians dead.  It would be an understatement to say conditions in Libya do not currently support a lasting political arrangement.

I don’t know if you saw this report a couple of weeks ago but the World Bank in its International Comparison Program reported that China is on track to become the number one economy by sheer size in the early 2020’s.  In 2011 China’s economy was 87% the size of the U.S.’ or 15% larger than the previous estimate.  China’s National Bureau of Statistics, which took part in the study, rejected the conclusions according to the World Bank.  China’s government has been reluctant to acknowledge previous milestones showing economic arise when it passed Germany as the biggest exporter, Japan as the No. 2 economy and the U.S. as the biggest trader.  China’s leaders downplay these comparisons probably to avert having to take on financial obligations or make concessions on trade and climate change while at the same time it continues to press its borders in the South China Sea antagonizing its neighbors in the region including Indonesia, the Philippines and most importantly, Japan.

Have a good day.

Bob Shiring

Sr. Energy Advisor