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Morning Energy Blog – March 9, 2016

Equities and the Economy

U.S. stocks snapped their five day win streak closing lower dragged down by falling oil prices and concerns about a prolonged slowdown in the Chinese economy. The Dow fell 110 points, 0.64%, to 16,964, the S&P 500 dropped by 23, 1.12%, to 1,979 and the Nasdaq was off 59, 1.26%, to 4,649. As I mentioned yesterday, China announced that exports in February fell 25.4% y-o-y, the most since May 2009, and imports were down 13.8%. This definitively caught investors’ attention. And then of course you had the correlation between oil prices and stock prices with oil prices closing lower. Then there are the technicals. The S&P 200 day moving average, a big moving average data point, is always resistance on the way up, and support on the way down, and it’s currently at the 2,008-2,009 level basis the S&P. As I’ve stated many times, you may not follow the technicals, and even pooh-pooh them, but the professional money does. The old adage in investing and trading is “use the fundamentals to determine the trend and the technicals for timing your entries and exits.” Let’s call yesterday’s price action profit taking.

The NFIB released its Small Business Optimism Index yesterday with it falling a point to 92.9 in February from January. This was a ho-hum number but the NFIB spokesperson said, “the small business sector is treading water. Earnings worsened a bit with owners reporting widespread gains in workers compensation while holding the line on price increases. The political climate continues to be the second most frequently sited reason for the current period being a bad time to expand.”

Stocks are working on capturing back yesterday’s losses with Dow futures up 48 points. The major Asian indexes closed lower but this was a reaction to yesterday’s falling U.S. equities. European equities are markedly stronger being up around 1% after posting two consecutive days of declines.

The big news of the week will come tomorrow when the ECB concludes its meeting and Mr. Draghi has his press conference. Expectations are for more QE: another 10 basis point drop in the bank’s base deposit rate to -0.4% (yes, minus) and a 10-30 billion euro expansion of its bond buying program as the bank tries to push inflation to 2%.

I’ve been talking recently about yield in Japan, more specifically, how hard it is to come by. The Bank of Japan’s 10 year notes have a yield of -0.101% and 40 year note has a yield now of just above zero. Think about that! You give the bank money for 40 years and make virtually no interest! Wow!

Oil

As mentioned above, oil prices closed down yesterday with WTI losing $1.40 closing at $36.50 and Brent off $1.19 settling at $39.65. Keep in mind that yesterday’s retracement came after oil prices rose for 7 consecutive sessions. The aforementioned Chinese trade data and the Goldman Sachs report yesterday that commodity prices were getting ahead of themselves put a damper on the whole commodities market. Oil prices are higher today, 63¢, trying to rekindle the market’s past month long $12 per barrel rally. WTI is garnering support from an EIA report this morning stating that U.S. crude oil production continues to decline with oil production hitting its lowest level since November 2014. Production also declined from year-ago levels for the first time in more than 4 years. U.S. crude production in December 2015 averaged 9.3 million bpd down 166,000 from December 2014 and the first y-o-y decline since September 2011. U.S. production peaked in April 2015 hitting 9.7 million bpd.

Somewhat dampening the enthusiasm generated by the EIA’s report was API’s weekly report last evening noting that U.S. crude inventories continue to rise, last week by 4.5 million barrels which was above forecasts of 2.8 million barrels. Gasoline inventories fell marginally greater than expectations and distillates were at expectations. In summary, the report was marginally bearish.

Here’s some staggering data for you. In a study just concluded the University of Houston reports that for every rig taken off line 224 jobs in aggregate are lost. Let’s do some simple math. Two years ago there were just over 1,600 rigs working. Today, less than 400. That equates to a moss of around 270,000 jobs. Oil and gas prices are very low right now. Where are those calls by ridiculous congressmen and women shouting the market is being manipulated by speculators?!

Blog Weather 3-9-16
WEATHER BAR IMAGE FOR BLOG
Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices continue their grind higher with the April Nymex contract closing up 2.2¢ at $1.712. The calendar strips closed pretty flat to Monday’s prices. Weather forecasts continue to show well above normal temperatures for the next 10 days then shift slightly cooler but even then there’s no cold weather in any region that matters. And then we’re a week from April which is the beginning of the storage injection season, i.e., no load. It’s all quiet on the natty front with us up 1.4¢ this morning. Folks, even with the recent price rise natural gas is incredibly cheap. Tomorrow we have the weekly EIA storage report which is always exciting.

Elsewhere

Credit. It’s ubiquitous. Everyone uses it. How many credit cards do you have? The history of credit is quite interesting. The word “credit” comes from Latin meaning ‘”trust.” Credit was first used in Assyria, Babylon and Egypt 3,000 years ago. In the 14th century the bill of exchange – the forerunner of banknotes – was established. Debts were settled by 1/3rd cash and 2/3rds bill of exchange. Paper money only came into prominence in the 17th century.

The first advertisement for credit was placed in 1730 by Christopher Thornton, who offered furniture that could be paid off weekly.

From the 18th century until the very early part of the 20th, tallyman sold clothes in return for small weekly payments. They were called “tallyman” because they kept a record, or tally, of what people had brought on a wooden stick. In the 1920’s, a shopper’s plate, a “buy now, pay later” system, was introduced in the U.S.

In 1950, Diners Club and American Express launched their charge cards in the U.S. marking the advent of the first “plastic money.” In 1951, Diners Club issued the first credit card to 200 customers who could use it at 27 restaurants in New York. However, it was the establishment of standards for the magnetic strip in 1970 that catapulted the credit card into the information age and exploded its use.

As you well know, there are disputes over credit charges and almost half of them are about internet transactions. The default rate on the 1.5 billion credit cards in the U.S. is 13%.

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