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Morning Energy Blog – March 4, 2016

Equities and the Economy

U.S. equities chalked up a third day of gains yesterday with the Dow closing 45 points higher at 16,944, the S&P 500 adding 7 to 1,993 and the Nasdaq ending up 4 points at 4,707. Once again, the price action was positive with the indexes trading negative the first half of the day but closing near session highs. By the way, gains in equity prices aren’t just occurring in the U.S. World stock markets touched a two month high yesterday. There’s no doubt folks its “risk on” time. You know about the rebound in oil prices over the last two weeks but it’s not just oil. Money is flowing into all commodities. Yesterday copper, which has the PhD of the primary metals, hit its highest level since November. Now admittedly the primary metals got a big boost from China, which consumes massive amounts of commodities, which moved to cut its banks’ reserve requirement earlier this week (a huge form of QE), but it is what it is and that is after just about all commodities hitting price lows about a month ago they are rallying. Now, as Billy Shakespeare would say, “Here’s the rub.” Yesterday gold closed at $1,258.20, its highest price in a year. That’s a risk off move. Investors buy gold and U.S Treasuries as a defensive play. I’m really not sure what’s going on here but it’s not adding up.

Yesterday the Labor Department released its weekly report for initial jobless claims noting claims rose 6,000 last week to 278,000 which was perhaps 6-8,000 above economists’ expectations. The less volatile four week average fell 1,750 to 270,250. Bottom line, it was pretty much a non-event. The Institute for Supply Management reported that its index of service sector activity fell from 53.5 to 53.4 in February. This was the lowest in 2 years but ever so slightly better than had been feared so it too had no effect on the market. Good news came for the Commerce Department which stated factory orders for nondefense goods excluding the sales of aircraft, the latter being very volatile, rose a nice 3.4% month-on-month. This is an important data point for investors for it viewed as a proxy for business investment plans.

This morning is starting out somewhat quietly with Dow futures are up 35 points reacting to the Labor Department’s Employment Situation report which was literally just released. I’ll comment on the report on Monday. By the way, technical resistance is at 2,000 basis the S&P 500.

Oil

Oil prices stabilized yesterday with WTI closing down 9¢ at $34.57 while Brent added 14¢ to $37.07. This was Brent’s first close above $37 since January 4th and it’s looking at gaining 6.4% for the week. So often it’s about headlines in oil and the latest is that the Nigerian oil minister stated that a meeting is set to take place on March 20th in Russia between OPEC and non-OPEC producers regarding capping output. Beyond the headlines there are fundamental things happening out there. Although U.S. crude stockpiles are at record levels, the EIA also reported this week that U.S. oil production feel to its lowest level since November 2014 with U.S. output registering 6 consecutive weekly declines.

This morning WTI is up 21¢. I think we’re heading to $40, but then the game changes. Why? Because $40 is the new $70. Whereas producers previously said they needed $60 to $70/bbl to make drilling for shale oil profitable ,now with rig rates and fracking costs having fallen precipitously over the last year and producers dramatically improving productivity, they’re saying they can make money in the low to mid $40’s. Example, Harold Hamm, CEO of Continental Resources, said this week he is prepared to increase capital spending if U.S crude prices reach the low to mid $40’s. Rival Whiting Petroleum, the largest producer in North Dakota’s Bakken, said they would complete previously drilled wells at that same price level. If these two companies feel they can make money at that level, a lot of others can too.

Blog Weather 3-4-16
WEATHER BAR IMAGE FOR BLOG
Courtesy of MDA Information Systems LLC

Natural Gas

The April natural gas Nymex contract fell 3.9¢ yesterday closing at $1.639. Of note, the dated calendar strips once again moved in the other directions closing 1-2¢ higher. Yesterday the EIA reported that 48 Bcf was withdrawn from storage last week. This was mildly bullish for expectations were for a 42 Bcf withdrawal. Storage levels are currently at 2,536 Bcf which is 46% above last year at this time and 15% greater than the 5 year average. I’m sure we’ll get another withdrawal next week with the cold, albeit normal, weather in the major gas consuming regions of the country this week, but with much above temperatures coming into the eastern 2/3rds of the country for the march 9th to 18th time frame and average temperatures increasing, withdrawals from storage for that time period will be anemic. Speaking of the weather, on Wednesday Cincinnati is supposed to hit a high of 79 and Philadelphia 80! Holy Toledo!

This morning natty is sedate being down 0.2¢. Chatter.

Elsewhere

We all know that Wilbur and Orville Wright were the first to fly. On Friday, December 17, 1903 at 10:35 AM Orville made the first powered flight at Kitty Hawk. It lasted 12 seconds. Wilbur made the second flight, which lasted a second longer than the first. Orville took the 3rd flight and it covered 200 feet in 15 seconds. At noon, Wilbur made the 4th flight on that blustery day with the Flyer covering a huge 852 feet in 59 seconds and landing safely. Prior to that date, March 23, 1903, the brothers applied for a patent for their new invention. This allowed them to request a fee for using their design which infuriated other aviators who refused to pay the fee.

But were the Wright Brothers the first to fly? Richard Pearse, a New Zealand farmer, working single handedly in his barn, designed and built his own engine and flying machine with dating suggesting that Pearse made his first flight in March 1902. His remarkable success though remained fairly unknown until recently.

Then there is Gustave A. Whitehead. His descendants claim he took a birdlike monoplane to the air at early dawn on August 14, 1901 near Bridgeport, CT. Although there are no blueprints of Whitehead’s craft, evidence is mounting that he might indeed have been the first to have taken to the sky in a machine-powered aircraft.

So like so many things, like who discovered America (Christopher Columbus or Leif Erickson?), things aren’t always as clear cut as once thought. By the way, the first airline passenger was Charles W. Furras, the mechanic for the Wright Brothers, when Wilbur gave him a 29 second ride in 1908.

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