Equities and the economy

We had a second consecutive day of lackluster trading in equities with the Dow closing up 22 at 17,252 while the S&P 500 and Nasdaq both closed lower. The former 4 to 2,016 and the latter by 22 to 4,729. With the bevy of central bank meetings investors are on hold, at least until today when the FOMC completes its second and final day of meeting. Yesterday I stated there would not be a post meeting press conference. I was incorrect and I apologize. Fed Chairperson Janet Yellen will have a post meeting press conference. All ears will be tuned in, however, the market is not expecting any change in interest rates and of course no bond buying (unlike the ECB) with that program having concluded months ago. That being said, the communique will be closed parsed with folks looking for direction from the Fed on when the next interest rate increase will come, and it will. By the way for you technicians, S&P support is 2,005. Resistance is 2021 and above that is a break out. Below 1994 panic will set in.

Let’s move on to fundamental data, and there was quite a bit. The Commerce Department reported that retail sales fell 0.1% in February with core sales, sales that exclude gasoline, autos, building materials and food services, unchanged. The sales data was mixed for expectations were for a greater drop in overall sales but a 0.2% increase in core sales. Disconcertingly, January’s sales were revised for the worse. January sales were originally reported to have risen by 0.1% but were revised to have fallen 0.4% instead. This cannot be characterized as anything but disappointing.

The same report stated that producer prices fell 0.2% in February which was as expected. This statistic will allow the Fed to delay an interest rate increase as they work to get inflation to their 2% target.

Finally the National Association of Home Builders released its index for March which came out at 58 which came in as expected remaining well above 50 indicating home builders are positive about the future.

Markets remain on pause waiting for Janet with Dow futures down a meaningless 7.

Oil

Oil prices fell for a second consecutive day with WTI closing off 84¢ at $36.34 and Brent down 79¢ at $38.74. As I mentioned yesterday, prices “down the curve,” and I’m talking just a few months, are above $40 which will bring in some producer hedging. I bet that it will also stop the rig count from dropping, if not increase marginally. Some producers (Harold Hamm of Continental Resources) have stated they can make money drilling in some locations with oil prices in the mid $40’s. Oil prices are currently near Goldilocks levels. Not too hot. Not too cold. I do believe true equilibrium is closer to $40 basis the front month which by the way is up $1.12 at $37.46 this morning. Oil is getting a boost from two sources. First, the API reported that U.S. oil inventories rose 1.5 million barrels last week. While this is obviously an increase, it is less than forecasts of a 3.0 million barrel increase. Remember, it’s how actuals come in compared to expectations that move markets for expectations are built into the price before actuals are released. Second, the Qatari energy minister said today that OPEC and other key oil producers will meet in Doha in April 17th to discuss stabilizing oil prices. He said 15 countries accounting for 73% of global output will be represented, including Saudi Arabia and Russia. He did add that Iran would be excluded from having to freeze production.

Courtesy of MDA Information Systems LLC

Natural Gas

You just can’t kill it. No load. Storage levels at record highs. And natural gas prices keep inching higher. Yesterday the April contract closed up 3.2¢ at $1.851. The Spring Rally continues, to the order of nearly 30¢ in less than 2 weeks. Impressive! This is after hitting 18 year lows last month. I’m sure traders are aware of Platts Bentek data released yesterday noting U.S. daily production dropped to a two month low. Add that to demand that’s increasing and you now understand the Spring Rally. This morning natty is basically unchanged from yesterday’s settle being down a penny.

Elsewhere

I know you’ve all heard the term “fracking,” but do you really know what it is? It’s not new. It’s been around for more than 60 years. Only until recently, however, has the technology been advanced enough for the process to be used by oil and gas exploration companies to produce a significant portion of crude oil in the U.S. Hydraulic fracturing, which is often used with horizontal drilling, has allowed the U.S. to increase its oil production faster than any time in history! In 2000, approximately 23,000 hydraulically fractured wells produced 102,000 barrels of oil per day which was less than 2% of the national total. By 2015, the number of hydraulically fractured wells grew to an estimated 300,000 and production from those wells had grown to more than 4.3 million bpd making up 50% of the total oil output of the U.S! This new oil production has primarily come from shale and other tight rocks in the Eagle Ford formation and Permian Basin of Texas, the Bakken of North Dakota and the Three Forks formation of Montana.

So what exactly is hydraulic fracturing? It is the process of forcing a liquid (primarily water) under high pressure from a wellbore against a rock formation until it fractures. The fracture lengthens as the high-pressure liquid in the wellbore flows into the formation. This injected liquid contains a proppant, or small, solid particles (usually sand or a manmade granular solid of similar size) that fills the expanding fracture. When the injection is stopped and the high pressure is reduced, the formation attempts to settle back into its original configuration, but the proppant keeps the fracture open. This allows hydrocarbons such as crude oil and natural gas to flow form the rock formation back to the wellbore and to the surface.

So the next time you’re at a social function and the term “fracking” comes up, you’ll be able to dazzle the group with your knowledge of hydraulic fracturing!