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Morning Energy Blog – May 10, 2016

Equities and the economy

Yesterday was a nothing day for U.S. stocks with the major indexes closing in different directions. The Dow closed down 35 at 17,706, the S&P 500 eked out a gain of a couple points ending at 2,059 while the more Nasdaq being the best performer of the day closing up 14, 0.3%, at 4,750. Overall, though it was all chatter. Caterpillar was the worst performer on the Dow falling 3.5%. I and many investors watch Caterpillar because is a good barometer of the global economy. Being a global company selling heavy equipment, if the global economy is growing their sales increase and vice versa. The stock hit a 6 year nadir January 25, 2016, rallied to a recent high on April 19th and has now fallen back to where it was a year ago, March 2015. Go take a look at the S&P and you’ll see a similar pattern. The S&P bottomed in February of this year, rallied to its recent high in April and now has fallen back from that high.

This was no economic reports of significance released yesterday so let’s move on to this morning. The day is beginning better than the last couple of sessions with Dow screaming up 151 points. There was no major news released overnight so U.S. equity futures rising the coattails of foreign equities with the major Asian markets closing marginally higher and the European markets currently trading the same. The last few days have been sedate, and the data is bearing this out. The Chicago Board Options Exchange’s Volatility Index, aka fear index, is near its lowest level in a year and it’s been a month since the S&P has moved more than 1% in either direction. So what does this mean? It means that all the worries that people were really anxious about earlier this year from rising corporate defaults to slowing Chinese growth have been put on the back burner. My prediction: volatility is right around the corner. Why? One, we have the vote in the UK next month on whether the UK is to remain in the European Union or not, aka Brexit, which is too close to call currently, and two, here in the U.S. we have the most polarized election we’ve seen in our lifetimes only 6 months away. Hold on to your hats!

Earnings season is just about over, and it wasn’t very good. Earnings of S&P 500 companies on average fell 5.5% in Q1 2016 and revenue was down 1.9% y-o-y. The good news is that the performance bar going into this earnings season was set so low no one was surprised.

Oil

Oil prices took a hit yesterday ending at 2 week lows with WTI losing $1.22, 2.7%, closing at $43.44 and Brent falling even more, $1.74, 3.8%, at $43.63. The market got weighed down on reports from private research firm Genscape reporting that inventories at Cushing, OK, the Nymex crude oil delivery point, rose 1.4 million barrels. Also weighing on the bull’s yoke has been the strengthening U.S. dollar which had fallen to a multi-month low following the Fed’s comments after their last meeting and is now rebounding hitting an 8 day high. Kind of surprising to me that oil took such a big hit being it’s estimated that 1.6 million bpd are estimated to be shut-in in Alberta due to the massive wildfire as well as Shell and Chevron stating they’re evacuating workers in Nigeria’s Niger River Delta due to attacks on their facilities by terrorists which is curtailing production there.

Per Russia’s top oil executive Igor Sechin, OPEC is all but dead. To use his exact words, Sechin, one of Putin’s closest allies said, “As for OPEC, it has practically stopped existing as a united organization.” He bases his comments on the fact that arch enemies Saudi Arabia and Iran cannot agree on a production ceiling. Speaking of Saudi Arabia, over the weekend its decades long serving oil minister, Ali al-Naimi, was replaced by the newly appointed energy minister Khaled al-Falih who was previously the head of Saudi Aramco. Falih has been very vocal over the past year that the oil market needs to rebalance through low prices, and that the Saudis have the resources to wait. Bottom line, don’t expect the Saudis to limit production anytime soon.

This morning WTI is bouncing a tad up 83¢.

Blog Weather 5-10-16
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Information Systems LLC

Natural Gas

Natural gas prices did little yesterday with the June contract closing down 0.3¢ at $2.098. Complete chatter. We’ve now spent more than 3 weeks waffling around $2.100. The market is balancing record amounts of gas in storage vs. flat to declining production in conjunction with increasing demand. Over the next 10 days there’s not going to much demand from Mother Nature showing normal to below normal temperatures for the east and south. The forecast does warm up in the 11-15 day time frame though with some above normal temps hitting the eastern half of the country which will definitely get air conditioners running in the south boosting natural gas demand. Speaking of demand, the FERC just approved Energy Transfer Partners’ Presidio Border Crossing project including a presidential border crossing permit (if you recall, the lack of the presidential permit is what killed the Keystone pipeline crossing into Canada). The pipeline will transport 1.3 Bcf/d into Chihuahua, Mexico beginning in early 2017. You clients know what I’ve been saying about Mexican exports. Strong.

This morning natty is climbing up 5.6¢.

Elsewhere

We’re about to enter the busiest travel season of the year and you may be flying somewhere. If you are you can thank Southwest Airlines for keeping prices lower than otherwise. The industry calls it the “Southwest Effect.” It is the name to describe how airfares offered by the nation’s major carriers decline after Southwest starts to compete with those airlines on specific domestic routes. Now the Southwest Effect is being felt on international flights. Southwest has begun serving Mexico, Central America and the Caribbean and guess what? A study found that fares to these areas fell by as much as 25%! Get your sunhat and sunscreen!

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