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Morning Energy Blog – March 17, 2016

Equities and Economy

While the Fed did, or didn’t do, what investors expected by not raising interest rates (the Fed Funds rate), it did cast a dovish tone implying in its post meeting communique that one, possibly two, interest rate increases could be anticipated in 2016 which contrasts to their December message projecting four increases. This is obviously bullish of equities and investors jumped in pushing the indexes higher. The Dow closed up 74 points, 0.4%, at 17,326 and at a new high for 2016, the S&P 500 logged an 11 points gain, 0.6%, to 2,027 breaking resistance of 2,021, and the Nasdaq tacked on 35 points, 0.8%, to 4,764. During her press conference Janet Yellen stated that the global economy is running a bit below expectations and acknowledged a softness in exports and business investment but added the global slowdown has affected the Fed’s baseline case for the U.S. economy. Regarding inflation, which has been the key data point of late since the unemployment rate is now pretty much at target, Yellen said the lack of convincing evidence of a pickup in wage growth suggests continued slack in the labor market, but inflation is gradually expected to move back to 2% over time which the Fed believes is the optimal level. However, and this was a justification for not raising interest rates at this time, the Fed cut its estimate for its preferred inflation measure, the core personal consumption expenditures to 1.2% down from a prior forecast of 1.6%. She and the Fed have a lot more information than I do and are a lot smarter than I am but that last statement confuses me because the Labor Department reported yesterday that although consumer prices fell 0.2% in February vs. January, they rose 1% for the 12 month period and that the all-important core CPI, which excludes the volatile food and energy prices, rose 0.3% for the month and 2.3% on an annualized basis, the largest gain in three years! Obviously, 2.3% is much greater than 2.0%! I’m pretty sure this is what’s going on. This Fed group is moderately dovish (yes, there’s a measure for that!) and the Fed is erroring cautiously and will tolerate a little greater degree of inflation rather than raising interest rates and risking derailing the economic recovery. By the way, there was one dissenter, Esther George, who wanted to raise interest rates now by 0.25%. The FOMC meets next on April 26-27.

Moving on to other economic data, industrial production fell 0.5% in February and this was a bit worse than the forecast of -0.3%. Factory production rose 0.2% but mining production, of which oil and gas exploration is included, fell 2.4%. No surprise there. Good news came from the Commerce Department which reported housing starts rose 5.2% in February to an annualized rate of 1.18 million units coming in greater than forecasts of 1.15 million units. The strength was in the single family home category where starts rose a big 7.2%.

Asian markets closed mixed but Hong Kong’s Hang Seng and China’s Shanghai finished strong up 1.2% and 1.20%, respectively. European equities are materially weaker this morning with Germany’s DAX and France’s CAC 40 retreating trading 1.51% and 1.09%, respectively, lower, In the face of weaker European equities U.S. futures are performing quite well with the Dow up 9 points. Chatter.

Oil

Oil is strong. Not $60 strong but a lot stronger than $26. Yesterday WTI popped $2.12, 5.8%, closing at $38.46 and Brent climbed $1.59, 4.1%, settling at $40.33. Oil prices rose on both headline and fundamental news. Regarding the former, as I mentioned in my Blog yesterday, a meeting of OPEC and other key producers is scheduled for April 17th to discuss freezing production at January levels. Regarding the latter, the DOE reported in its weekly crude and products inventory report that although U.S. crude stockpiles increased by 1.3 million barrels to a record 523 million barrels, the increase was below a 3.0 million increase forecast. The agency also reported that U.S. production fell by 10,000 bpd last week, its 8th weekly drop out of 9. Additionally, the U.S. dollar has been weakening, 4 days in a row, which always supports oil prices.

This morning WTI continues to rise with the April contract up 97¢ with the U.S. dollar materially weaker on the heels of the dovish move by the Fed. Of note, every WTI Nymex contract is trading above $40, save the prompt contract. August is trading $42.66. Folks, I guarantee you the rig count is going to stop falling. It may even increase. Maybe not in this Friday’s report, but in subsequent ones.

Blog Weather 3-17-16
WEATHER BAR IMAGE FOR BLOG
Courtesy of MDA Information Systems LLC

Natural Gas

The Spring Rally continues! No HDD’s. No CDD’s. Tons of gas in storage. Yet prices continue to rise. Yesterday the April contract closed up 1.7¢ at $1.868. Prices have risen in 7 out of the past 8 sessions. The daily gains in natural gas prices have not been large, but they have been relentlessly higher. Traders are looking beyond the spring. Today the EIA releases its weekly storage report and the market is looking for a 9 Bcf withdrawal.

Here’s one of the reasons natural gas prices are firming. The EIA is forecasting that in 2016 and for the first time ever electricity generated by natural gas will exceed electricity generated by coal. On a monthly basis the first time this happened was in April 2015, but for all of 2015 more electricity was generated by coal than natural gas. Cheap natural gas as well as tougher environmental regulations on burning coal are the reason.

This morning in pre-EIA storage report trading it’s quiet with natty up 0.7¢.

Elsewhere

Be so, so glad you do business in the U.S. Here’s an example of what happens in so many other countries of the world. In this case, Nigeria which, and I bet you didn’t know this, is Africa’s largest economy. Well Mr. Samuel Akura, Nigeria’s auditor-general, did an audit of Nigeria’s state oil company and presented his findings to the national assembly. Here’s what he found. The oil company failed to remit to the government a bit more than $16.1 billion in 2014. He added that another billion or two was not remitted to the government by other agencies. “Not remitted” is the politically correct term for stolen! $16 to $18 billion! In Africa’s largest economy! To say Nigeria is a kleptocracy is an understatement! I feel so very sorry for African citizens. It is a continent so rich in resources yet so many of its leaders so incredibly corrupt padding their pockets while their constituents live in abject poverty.

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