Equities and the economy

Led by higher oil prices and energy shares the Dow and S&P 500 finished marginally higher yesterday coming within striking distance of new all-time highs. The Dow gained 18 points finishing at 17,938 after briefly topping 18,000 for the first time since April. The S&P closed up 3 points at 2,112 chalking up an intraday high of 2,119 before pulling back. The advance was sufficient for the S&P to log its best close since July 22nd and is now less than 1% off its record high of 2,131 set on May 21st of last year. The Nasdaq was on a different planet yesterday declining 7 points to 4,962. Biotechnology stock fell 2.6% pulling the tech-laden index lower. Stocks remain buoyed by the market’s belief interest rates will now not be raised at the June FOMC meeting and not likely at the July meeting. Remember, this is a dovish Fed led by a dovish Chairman which means the Fed will error toward easier monetary policy which is good for U.S. equities.

It was another quiet day regarding fundamental data so let’s move on to this morning and it’s Bill Murray’s Groundhog Day with the Dow up 27 and trying to bust through resistance and go on to new highs. The Asian markets closed mixed and European markets are trading the same all keeping an eye on the next risk event which is the Brexit vote on June 23rd.

Oil

Oil prices have been flying higher of late with WTI posting another gain yesterday adding 67¢ closing at $50.36 hitting fresh 2016 highs and settling over $50 for the first time in almost a year. Multiple forces are at work here, some old and some new. Old, first, as I’ve mentioned in previous Blogs, Nigerian oil production is significantly lower with the Niger River Delta Avengers wreaking havoc on facilities in that region. (I know this is a serious matter but every time I write that group’s name I think of Marvel.) The Nigerian oil minister has said he is open to talks with the militant group but as of yet nothing has happened. Shell has said their operations will remain closed until they are assured their employees are safe, second, while workers are returning to the Canadian oil sands facilities it’s going to take weeks, probably months, to get production up to pre-wildfire levels. Now for the new. First, the dollar has been weak of late marking two week lows which is not only supporting oil prices but grains, sugar, coffee, and cocoa. Second, the API released its crude and products data yesterday evening noting an aggregate drop in inventories of 3.2 million barrels which was greater than expectations as well as the 5 year average of an increase in stocks of 2.6 million barrels. The wildfires are the reason for this decline. Third, demand for oil in India is skyrocketing. Per the IEA, the country’s demand has surpassed China, growing by 400,000 bpd in Q1 2016, the fastest growth in the world and accounting for 30% of the total global demand increase.

WTI is blowing through the $50 this morning being up 78¢ at $51.14, and saving some U.S. independent & gas companies. By the way, our EIA yesterday stated they forecast U.S. oil production to drop by 830k bpd this year and 410k bpd in 2017.

Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices ended little changed yesterday gaining 0.08¢ closing at $2.474. I should say, little changed for the front month for the calendar strips (’17, ’18, ’19) were up at least 2¢ with the 2017 strip popping 4.7¢. That’s a big move for that strip. For most of you the calendar strips are much more important than the July contract because you’ve already locked in this year’s gas and electricity. The extended forecast has and is supporting prices. While the 1-5 day forecast is for below normal temperatures for Pennsylvania into New England, the 6-15 day forecast is bullish particularly for the upper Midwest. And I just received the weather forecast for July and August and let’s just say it’s going to be toasty for the upper Midwest and northeast for those months. With all the coal to gas switching that has occurred, particularly in the Midwest, we’ll see a record burn of natural gas in electric generation this summer.

This morning natty is 0.2¢. With prices close to $2.50, an 8 month high, the market may need to take a pause and reassess.

Elsewhere

We think of the guillotine as an archaic apparatus used for executions. Maybe not so archaic. The last time it was used was 1977, a few months after Star Wars was released.