Equities and the Economy

Good morning. After the biggest sell off in two months amid a surging dollar U.S. stocks stabilized yesterday albeit at marginally lower levels with the Dow closing down 28 at 17,635, the S&P 500 off 4 to 2.040 and the Nasdaq losing 10 to 4,850. Most of the day the indexes switched between small gains and small loses. For the year the Dow and S&P are down while the Nasdaq is up. That surging dollar is hurting American equities but helping foreign stocks for the S&P is down 0.8% on the year trailing all but one of 24 developed markets. Due primarily to the strength in the dollar analysts predict S&P 500 companies profit will drop 5.1% this quarter after a 4.4% increase in the final months of 2014. If this were to actualize it would mark the first period of negative earnings since 2009. There really was no economic news of consequence released yesterday.

February retail sales data was just released by the Commerce Department showing a decline of 0.6% for the month after a 0.8% drop in January and a 0.9% drop in December. Economists were looking for a 0.3% increase. If you take out gasoline sales were even worse down 0.8% for the month. The market this morning seems to be taking in in stride though with Dow futures up a nice 125. By the way, Japan’s Nikkei closed at a 15 year high. Should have stayed in NKY.

Oil

The DOE released its weekly crude and products data reporting an aggregate build in inventories of 6.7 million barrels on an expectation of a decline of 2.7 million barrels. Although bearish the market took the number in stride with WTI closing down only 12¢ at $48.17. Brent fared a lot better settling up $1.15 at $57.54. Driving the latter higher were comments by ECB president Mario Draghi’ that the weak euro was doing much to help strengthen the economy in Europe raising hopes that demand for crude there shall rise accordingly.

I’ve seen a lot of articles lately about storage levels at Cushing, OK, the delivery point of the Nymex WTI futures contract. According to the EIA another 2.3 million barrels of oil moved into Cushing last week putting inventories at 51.5 million barrels. The all-time record is 51.8 million barrels set two years ago. It is believed that storage there is now 73% full. Since the start of the year an average of 2 million barrels of crude per week have moved into storage facilities there. Extrapolating that would mean capacity would be consumed by late April or early May. Now remember there’s also storage along the Gulf Coast which can be utilized as well as “floating” storage, i.e. ships. However, each marginal unit of storage capacity is more expensive which means the contango would get wider. Which is what’s preventing me from playing oil on the long side (USO or UCO) on a dip. The roll will kill you. This morning WTI is up 28¢.

Natural Gas

Natural gas continued its short covering rally yesterday despite testing new lows for the week early in the morning finishing up 9.2¢ at $2.824. We’re back waffling around that $2.80 price. We’ve been between $2.56 and $3.04 since mid-January. The below normal temperature forecast for the weather in the eastern U.S. is definitely supporting cash prices which is supporting futures prices. For the 11-15 day time frame the jet stream is forming a big ridge over Alaska with a big dip over the eastern U.S which is bringing in the colder temps.

Courtesy of MDA Information Systems LLC

Today is Thursday and we all know that means its storage report day. The market is looking for a withdrawal of 197 Bcf which is pretty hefty being the 5 year average withdrawal for this week is 116 Bcf. But remember, it’s all about how the number comes in compared to expectations. It looks like traders have their books right where they want them going into the report for natty is literally unchanged from yesterday’s settle.

Elsewhere

The lower oil prices are beginning to have a material effect on some states tax revenues. Last August Texas collected $583 million in oil and natural gas production tax receipts. In January ’15, just $352 million. That’s a 40% decrease. In North Dakota tax revenue fell from $323 million to $254 million, a 21% reduction. Alaska went from $108 million to just $26 million. The tax revenues from oil account for 90% of Alaska’s operating budget. Back when they were doing their budgeting Alaska assumed a $105 per barrel. Not fun times there. They’ve had a very warm winter (which is why the famous Iditarod race was moved farther north) so I guess their snow removal is under budget! Have a good day.