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Morning Energy Blog – May 2, 2016

Equities and the economy

U.S. stocks closed out April on a weak note with the Dow closing down 57 points, 0.32%, at 17,774, the S&P 500 off 11 points, 0.51%, to 2,065 and the Nasdaq falling 30, 0.62%, finishing at 4,775. However, the Dow and S&P clung on to monthly gains, 0.5% and 0.3%, respectively, for a second consecutive month. The Nasdaq had a bad month losing 1.9%. Weak earnings reports from bellwethers Apple and Intel triggered selling by investors with the former down 14% and latter 6.5% for the month. Also, that weak Q1 GDP report I mentioned to you last week showing a rise of only 0.5% weighed on the market but as I stated, I guarantee you that data point will be revised for the positive.

Turning to the fundamental economic data from Friday, Personal Income and Expenditures rose pleasantly rising 0.4% month-on-month. However, I’m sure the Fed was frustrated being that the index for the year fell 0.1% to 0.8%. Remember the Fed’s inflation target is 2%. The Chicago Purchasing Manager’s April report for manufacturing was released coming in at 50.4 which was decidedly disappointing and considerably lower than March’s index of 54. If there’s been one sector of the economy that has been struggling the last couple of years its manufacturing. Finally, the University of Michigan released its closely watched Consumer Confidence report with its index falling a point to 89 in April. This index continues to “leak” with it peaking out in early 2015 at near 97.

This morning the U.S. market is beginning the week sedately with Dow futures up 23. The major Asian indexes all closed lower with Japan’s Nikkei 225 getting hammered losing 3.11%, a 3 week low. Japanese investors can thank the decision by the Bank of Japan not to add more economic stimulus last week for the fall in the Nikkei which has also sent the yen materially higher hurting exporters there. The European markets are faring better the Asian markets with Germany’s DAX up a nice 1% and France’s CAC 40 up 0.51%. London’s FTSE isn’t doing as well being down 1.27%. Just a note that global trading volume will be thin today with it being a public holiday in many countries of the world which are celebrating May Day.

If you were a Japanese citizen how would the following make you feel? The Japanese 20 year bond is yielding a whopping 0.24%, a record low. So I buy a 20 year bond and I get paid 0.24% in interest annually for 20 years. I’d say folks are worried about preservation of capital.

Oil

On Friday oil prices closed basically flat to Thursday with WTI off 11¢ to $45.92 and Brent closing a penny lower at $48.13. There are two camps out there and both are vehement in their conviction. On one side you have the bears stating the current rally is overdone and not fundamentally sound with production from Russia and the Middle East on the rise. Then there’s the other camp noting U.S. production has and continues to fall which will bring supply and demand into balance. I’m in the latter camp, as long as the global economy doesn’t contract. That being said, I don’t see a blow off. I’m thinking $50 by year’s end. A point for the bears is that OPEC announced that production for April increased by 170,000 barrels to 32.64 million barrels. Tempering that a tad was another report noting Iranian oil in floating storage declined by 900,000 barrels. On the bulls side is the rig count. Baker Hughes reported on Friday that another 11 oil rigs were taken out of service last week. The oil rig count now stands at 332 which is the lowest number of rigs since the autumn of 2009, just before the fracking boom truly began in earnest.

By the way, the FX market is helping oil prices with the U.S. dollar chalking up its 3rd straight month of losses in April vs. a basket of foreign currencies.

Speaking of Baker Hughes, it was announced this morning that the proposed $28 billion acquisition of it by Halliburton is dead with the parties citing too much opposition from U.S. and European regulators. The deal would combine the world’s second and third largest oil field services companies. Halliburton now has to pay a $3.5 billion termination fee to Baker Hughes by May 4th.

This morning the bears are winning with oil down 82 cents.

Blog Weather 5-2-16
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Information Services LLC

Natural Gas

Natural gas prices skyrocketed on Friday with the June contract closing an even 10¢ higher at $2.178. An explosion on the Texas Eastern Pipeline in southwest PA is being “blamed” for the price pop. But take if from an old time natural gas trader, if this is the reason for the price rise it will be very, very short lived. Although there may be local price disruptions, gas will be rerouted through other pipelines and this explosion will not affect the North American supply/demand balance. And it looks like that’s what’s happening for natty is down 8.5¢ this morning.

Overall, the weather forecast on average over the next two weeks is benign for the major gas consuming regions of the nation. My attention is on U.S. production levels.

Elsewhere

Last week, April 26th, was the 60th anniversary of a revolution begun by a man who I would be shocked you ever heard of: Malcom Purcell McLean. Malcom Purcell McLean changed the world. Sixty years ago Mr. McLean retrofitted his cargo tanker ship, the Ideal X, from “bulk” loading to containers (58 to be exact) and had it steamed from the port of Newark to the port of Houston ushering in the era of containerization. Containerization led to a significant cost reduction of freight transportation by eliminating the need for repeated handling of individual pieces of cargo while improving reliability, reducing cargo theft and cutting inventory costs by shortening transit time. In 1956, hand loading a ship cost $5.86 a ton. Using containers the cost was 16¢ per ton, a 39 fold savings. Today’s international supply chains are a consequence of the intermodal development McLean set in motion.

In April 1957, McLean Industries built the first container ship, the Gateway City, which began regular service between New York, Florida and Texas. In the summer of 1958, McLean inaugurated the first container service between the U.S. and Puerto Rico with the Bessel Fairland. By the end of the 1960’s McLean company Sea-Land Service (he changed the name) had 27,000 trailer-type containers, 36 trailer ships and access to over 30 port cities. To expand, McLean sold Sea-Land to R.J. Reynolds, maintaining a board seat, who eventually spun it off to shareholders as an independent, publically held company and in that format the company achieved its highest revenues and earnings in its history. Sea-Land later merged with CSX Corporation which then sold it to Maersk Line, whose containers you see everywhere.

A top official for the International Longshoremen’s Association, Freddy Fields, was at the Newark dock for that maiden voyage and was asked what he thought of the newly fitted container ship. He responded, “I’d like to sink that son of a bitch.”

The Blog will not be published tomorrow for I will be travelling on business.

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