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Morning Energy Blog – March 22, 2016

Equities and the economy

Yesterday was a fairly quiet albeit choppy day with the major indexes eking out marginal gains. The Dow closed up 22 at 17,624, the S&P 500 added 2 to 2,052 and the Nasdaq closed at 4,809, up 13. But always up is better than down even if it is marginal and yesterday’s closes were a 4th consecutive up day and built on the market’s 5 weeks of gains after a very rocky start to the year. The Dow is now up 1.1% for the year and the S&P is up 0.4%. The Nasdaq needs to do some work. It’s down about 4%. The ever important value of the U.S. dollar rose 0.29% after falling the past 3 weeks by 3.1%, which is a huge change in such a short period of time. As I’ve previously discussed, the currency has fallen driven by the Fed’s message of fewer interest rate increases this year than originally thought.

Turning to the economic news of the day, the National Association of Realtors reported that existing home sales fell 7.1% in February to an annualized rate of 5.08 million homes. The was worse than expectations of a decline of 2.5%. The median price of a home rose 4.4% from a year ago to $210,800. Importantly, listings were down 1.1%. On the face of it the decline looks disappointing but the crux of it is that’s it’s an inventory issue. There’s just not enough of it. It’s possible that homeowners are just now coming out from being “under water” on their mortgages and with home prices escalating and the memory of the recession folks don’t want to take on more debt.

This morning, as I’m sure you’ve heard, there’s been two terrorist attacks in Brussels today. One at the airport and another on a rush-hour metro train. It’s kind of sad but I guess the markets are getting numb to these events for Dow futures are down just a little, 68 points, and even the European markets are only marginally lower. Safe havens have found a bid with gold up 0.72%.

Oil

Similar to equities, oil prices were sedate yesterday closing marginally higher. The April WTI Nymex contract expired yesterday up 47¢ at $39.61 and Brent 34¢ to $41.54. More information is coming out on the April 17th meeting of producers. OPEC Secretary General Al Badri is stating that approximately 16 countries will attend. I know this is premature but this is how I think the meeting will go. Countries will agree (except Iran who gets a “pass”) to freeze production at January 2016 levels, and then they’ll totally disregard the limits, except for Saudi Arabia. I’ve been following the Saudis for decades and one thing I can tell you, they do what they say.

Now that prices have increased to at least $40, with higher prices in the deferred Nymex contracts, there’s a change in rhetoric coming from some producers. That is that wells that were previously drilled but uncompleted (drilled but not fracked, hence, not producing) may now be fracked and completed and put into production. This makes sense. WTI prices one year forward are $45ish and two years forward $47ish. Now this is nowhere near the prices producers were receiving a couple of years ago but it’s evident by these comments and the rig count (up 1 last week) that producers can make some money at these levels. They may be driving Suburbans and not Ferraris but they are in business.

Higher oil prices are translating to higher gasoline prices. Yesterday AAA stated the average price per gallon for regular gasoline was $1.983, the highest so far in 2016. Prices have climbed for 25 of the past 27 days for a total of 28¢/gallon. Per AAA, “Fuel demand is at record highs for this time of years” being driven by the consumers reacting to the very low prices of late.

This morning the May contract becomes the prompt month and is down slightly, 40¢.

Natural Gas

After hitting a recent high last week of $1.950 natural gas prices have been retreating somewhat falling 16¢ including yesterday’s decline of 7.9¢ with the April contract settling at $1.828. The weather is benign over the next 10 days but it looks like the Midwest is going to get a pretty good shot of below normal temperatures in the 11-15 day time frame. This will kick on some heaters but that time frame is the first week of April where “normal” temperatures are much higher than those in January and February. We’ll see some gas load but it’s not going to be huge. Although gas load will be minimal, it’s nuke plant maintenance season and there will be a very large number of nukes plant going down for about 5 weeks which will keep a floor on gas load. This is normal stuff for the spring.

Did you see the article in the New York Times yesterday? The major banks (JP Morgan Chase, B of A, Citi and Morgan Stanley) announced they would no longer finance new coal-fired plants in the U.S. or other wealthy nations. Oh, by the way, Peabody Energy, the world’s largest private-sector coal company, announced yesterday they may have to file for bankruptcy protection, which follows the path already taken by 3 of the nation’s other large coal companies.

Blog Weather 3-22-16
WEATHER BAR IMAGE FOR BLOG
Courtesy of MDA Information Services LLC

Elsewhere

With President Obama visiting Cuba over the weekend marking the first time in 90 years a sitting president has set foot on the island nation, I thought it an appropriate opportunity to educate you on the U.S’ base at Guantanamo Bay. The last sitting president to visit Cuba was Calvin Coolidge, and unlike President Obama who arrived on Air Force One, Coolidge arrived in 1928 on a battleship! Guantanamo Bay has been a political hot topic since Obama was elected in 2008 because part of his platform was to close the base. Now I’m not going to go into the politics of the matter but it is at a minimum interesting that we’ve had a base there for all these years, especially considering it’s the only U.S. base in a communist country.

In 1898, the Spanish American War united Cuba and the U.S. Aided by the U.S., Cuba fought for independence from Spain. That same year, the U.S. captured Guantanamo Bay (the name “Guantanamo” means land among rivers), and the Spanish surrendered. In December 1898, the Treaty of Paris was signed and Cuba was granted independence. At the wake of the 20th century, the U.S. formally leased a 45 square mile parcel from newly independent Cuba to use as a fueling station.

The lease renewed in 1934 under Fulgencio Batista and President Franklin D. Roosevelt’s administration. The agreement required consent of both parties should either want to withdraw, that is, reconsider U.S. occupation of the base. Diplomatic relations between the U.S. and Cuba were severed in January 1961. In hopes the U.S. will forfeit the base, Cuba no longer accepts the $5,000 annual American rent. In 2002, Cuba officially requested that Guantanamo Bay be returned. Interpretation of the 1934 mutual consent agreement differs, causing squabbles between the two countries.

In 1964, Fidel Castro cut off the base’s water supply in response to the U.S. government having fined Cubans for fishing near Florida. As a result, Guantanamo Bay is self-sufficient producing its own water and electricity.

The naval base is divided into two functioning areas on either side of the bay. The east side of the bay is the main base and the airfield occupies the west side. Today both sides of the base’s 17 mile fence line are patrolled by U.S. Marines and Cuban militiamen.

Separated from the base by cacti and elevated landforms, residential Guantanamo Bay resembles many American towns being furnished with subdivisions, baseball fields and chain restaurants. Roughly 10,000 people reside there, 4,000 of which are in the U.S. military. The remaining residents are family members, local Cuban support staff and laborers from neighboring countries. There is a hospital, dental clinic, and a meteorological and oceanographic command station.

Following the September 2001 attacks on the U.S., several detention camps were built at the base which held hundreds of detainees. As of 2010, about 170 detainees remain with many of the prisoners originating from Afghanistan, Yemen, Pakistan and Saudi Arabia.

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