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Morning Energy Blog – March 28, 2016

Equities and the economy

U.S. stocks snapped a five week winning streak Thursday closing little changed. The good news was that the major indexes traded materially lower all day but recovered to end flat to Wednesday. The Dow rose 13 points to 17,516, the S&P 500 fell a point to 2,036 and the Nasdaq finished up 5 at 4,774. The market is still very much reacting to two factors, commodity prices, specifically oil prices, and the Fed’s pace of interest rate hikes. The former is transparent since investors can monitor every barrel of oil traded on the NYMEX. The latter is much less so and regarding that stocks came under pressure last week with comments by U.S. Fed officials raising expectations for more interest rate hikes than investors may be expecting. St. Louis Fed President James Bullard was the latest to join a chorus of officials who highlighted the chance of at least two rate hikes this year adding the next rate hike “may not be far off.” And remember that the hawkish Ester George, President of the Kansas City Fed, dissented at the last FOMC meeting wanting to raise interest rates at that meeting and not delay. The possibility of more interest rate hikes has strengthened the U.S. the dollar to a 5th day of gains, its best run since April.

Regarding economic data, the Labor Department released its weekly unemployment claims on Thursday and it came in little changed reflecting the low level of layoffs currently taking place across the economy. The labor market looks pretty good currently. On Friday, the Commerce Department reported some positive news which was the U.S. economy grew at an annualized rate of 1.4% in Q4 2015, better than Wall Street’s expectations, which is a meaningful upward revision from the previous 0.7% estimate. Overall, the U.S. economy is estimated to have grown at a rate of 2.4% for all of 2015.

This morning Dow futures are up 25 but I expect a pretty quiet day for apparently trading was very light in Asia and all of Europe is effectively closed today for Easter Monday.

Oil

Like equities, oil prices were little changed on Friday with WTI closing down 33¢ at $39.46 and Brent down even less, 3¢, at $40.44. Chatter. This morning WTI is up 5¢. More chatter. Baker Hughes’ rig count report of last week noted that after an oil rig count increase of 1 the previous week, the oil rig count fell by 15 to 372 last week bringing the total reduction in rigs “laid down” to 150 for 2016. Compared to a year ago at this time there are 441 less oil rigs and 141 less gas rigs working. The rig count continues to drop while U.S. crude inventories keep notching record highs. The U.S. oil producers’ increase in productivity is nothing short of amazing.

By the way, I mentioned in February that the number of shorts in the oil market was at an unstainable levels being nearly 200,000. Since that time prices have rallied and the number of shorts is now 68,000. Much more balanced.

You traders out there remember oil prices will face a head wind if the U.S. dollar keeps strengthening.

Blog Weather 3-28-16
WEATHER BAR IMAGE FOR BLOG
Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices eked out a gain on Thursday closing up 1.2¢ at $1.806. Prices got a minor bid from the EIA storage report on that day noting 15 Bcf was injected the prior week with the market looking for an 18 Bcf injection. Total inventories are now a whopping 1,017 Bcf, 69%, greater than last year at this time and 846 Bcf, 51%, greater than the 5 year average. So with storage levels so high why are natty prices around $1.80? Because of the well-known increase in demand in the future, production flat and forecasts for a warmer than normal summer.

This morning natty is flat to Thursday’s close. Being we’re at the end of March/beginning of April the weather is pretty moot being we’re in the pretty much “no load” time of year, which also means nukes are going down across the country for maintenance.

Here’s some data I found very interesting. Almost all the new electric generation installed in 2015 was either natural gas, wind and solar, which was no surprise. But what was surprising was that wind capacity accounted for the greatest addition, 8,112 MWs, or 41%. I would have thought natural gas fired generation would have been the greatest addition but it came in second at 5,999 MWs, or 30%. Even though solar came in third it still had a very strong year with 5,217 MWs, 26%, of additions. Regarding solar, a record amount of solar photovoltaic capacity was added to rooftops throughout the country last year with big additions in California and Arizona.

Elsewhere

Ever hear of Luxottica Group S.p.A.? My bet is that you or your significant other have touched their product. The origin of the company dates back to 1961 when Leonardo Del Vecchio started the company in Agordo, Italy which is north of Bellunoy. Del Vecchio began his career as an apprentice to a tool and die maker in Milan, but decided to turn his metalworking skills to making spectacle parts. So in 1961, he moved to Agordo which is home to most of the Italian eyewear industry (big hint right there!). In 1967 he began selling complete eyeglass frames under the Luxottica Brand which proved successful enough that by 1972 he ended the contract manufacturing business.

Convinced of the need for vertical integration, in 1974 he acquired Scarrone, a distribution company. In 1981 the company set up its first international subsidiary, in Germany, the first in a rapid period of international expansion. The company became listed on the NYSE in 1990. Going public gave the company funds to acquire other brands and is now the giant of the industry. Here’s a list of the companies Luxottica now owns: Ray-Ban, Oakley, Vogue Eye-wear, Sferoflex, Persol, Oliver Peoples, K&L (formerly Killer Loop), Eye Safety Systems (ESS), Arnette and Alain Mikli. They also makes eyewear under license for designer labels such as: Armani, Emporio Armani, Armani Exchange, Brooks Brothers, Bulgari, Burberry, Chanel, Coach, Dolce & Gabbana, DKNY, Michael Kors, Miu Miu, Polo Ralph Lauren, Paul Smith Spectacles, Prada, Ralph Lauren eyewear, Tiffany & Co., Tory Burch and Versace. And if that’s not enough, Luxottica also owns LensCrafters, Sunglass Hut and Pearle Vision. They are also the supplier to Sears Optical and Target Optical.

Luxottica has come under scrutiny for keeping prices high, especially for its Ray-Ban and Oakley lines. In 2012 60 Minutes did a segment focused on whether the company’s extensive holdings in the industry were used to keep prices elevated. Luxottica countered that they do have competitors at the retail level in the American market, such as Walmart and Costco. At least they don’t own Maui Jims which are made right here in the good ole U.S. of A!

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