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Morning Energy Blog – June 1, 2016

Equities and the economy

It was a bumpy day yesterday with the major indexes closing mixed. The Dow lost 86 points, 0.48%, closing at 17,878, the S&P 500 hung in there ending down just 2 points at 2,097 and the Nasdaq actually posted a nice gain of 15 points, 0.29%, finishing at 4,948. The end of the day marks were actually pretty good considering the Dow was down as much as 130 points. That being said, the Dow has risen 4 months in a row eking a gain in May of 0.1%. The S&P did much better rising 1.5% in May posting a third consecutive month of gains. I think investors may be a little bit cautious for we’ve had a nice big run since February and are approaching the record highs set last May.

There was a lot of economic data released yesterday. The report that got the most attention was the Commerce Department’s report on consumer spending (it is 70% of our economy!) which showed spending increased a whopping 1.0% in April from March which is the largest monthly gain in 6 years and above forecasts! Folks were sucking up new cars and trucks. Personal income rose 0.4% with wages and salaries rising 0.5% which is the 3rd gain in the first 4 months of 2016. The personal consumption index, the Fed’s favorite measure of inflation, rose 0.3% for the month and 1.1% y-o-y. Core prices, which remove the volatile food and energy categories, rose 0.2% m-o-m and are up 1.6% y-o-y. OK, so what does this all mean? It means the economy is on firm footing, the labor market is in pretty good shape and the consumer is feeling more comfortable and is opening his and her wallet and spending. Interest rate increase here we come! The only question is whether it’s June or July. The vote for the UK to leave the European Union (Brexit) is in 3 weeks and after the June FOMC meeting so this may give the Fed and excuse to wait a month, especially since a poll was just released showing the “leaves” are leading the “remains” currently, which is a reversal from a poll a few weeks ago.

Also yesterday Standard & Poor’s/Case-Shiller released its 20 city home price index noting the index rose 5.4% in March y-o-y and greater than economists’ forecasts.

The European Central Bank (akin to our FOMC) meets tomorrow with it widely expected there will be no changes in policy. It still needs time to assess the previous monetary easing policies it’s enacted

This morning with the Dow is down 80 points which is better than the 110 points earlier. We’re following the European markets which are trading markedly lower primarily on the aforementioned Brexit poll with London’s FTSE getting hit the worst down 0.8%.

Oil

The correlation between oil prices and equities continues to hold. Equities were up in the morning and WTI was higher. Equities fall and close lower and WTI prices fall. At day’s end WTI was off 23¢ at $49.10. Brent fell a meaningless 7¢ settling at $49.69. $50 has proven to be formidable resistance for both oils. The bulls took WTI above that level intraday but there was no buying so short term traders took it in the other direction. And continue to do so today with WTI down 92¢ which I believe is primarily on lower equity prices (more evidence of correlation).

Tomorrow OPEC begins its biannual meeting and don’t expect any policy or quota changes. Here’s an interesting fact for you. The last time OPEC made any change to the quotas assigned to its member nations was 8 years ago! That is a big contrast to the period of 1998 to 2008 when 27 changes were made to its production quotas.

Blog Weather 6-1-16
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Information Systems LLC

Natural Gas

Holy Toledo! Natural gas was on fire yesterday! (pun most definitely intended!). The July contract popped 11.9¢, 5.5%, closing at $2.288. Numerous factors were at play here. First, traders came in yesterday noting the weather forecast warmed up from the ones before the holiday. Second, the EIA released their monthly production report noting U.S. production fell 0.9 Bcf/d which was about 0.3 Bcf/d greater than expected. Third, technical resistance was broken when we breached the 200 day moving average at $2.19 which brought in short covering. The breaching of the 200 day moving average is often looked at by traders/technicians as a major trend change. So you had a trifecta yesterday for the bulls, and they took it and ran, or should I say stampeded!

This morning the bulls continue to push the market higher with natty trading up 4.6¢ which is down a couple of pennies from the high earlier.

Elsewhere

There are 61 nuclear power plants operating 99 reactors in the U.S. which are located in 30 states. Did you ever wonder where the uranium comes from to fuel these plants? Well it’s not from the U,S. Only 2.6% of the 57 million pounds of uranium purchased for these plants came from U.S. sources, Nebraska and Wyoming. Over 50% came from Canada and, are you ready? Kazakhstan.

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