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Morning Energy Blog – May 20, 2016

Equities and the economy

Another not-so-good day for stocks yesterday with the Dow falling 91 points, 0.5%, finishing at 17,435, the S&P 500 closing down 7, 0.4%, at 2,040 an the Nasdaq was off 27, 0.6%, to 4,713. It could have been worse. At one point during the day the Dow was down 197 points! Yikes! From a broader perspective, the Dow and S&P touched 2 month lows yesterday and are now negative for the year. The Dow is down 4.8% from its all-time high set exactly a year ago yesterday. Investors are definitely a little skittish about the Fed raising interest rates, specifically at its meeting next month. However, we really haven’t seen a massive sell-off, like we did in the taper tantrum in 2013, and that may be because indeed the U.S. economy is in pretty good shape. Not crazy good. Just good with the major economic indicators the Fed watches in making monetary policy all hitting their targets, which is why they’re talking about raising interest rates.

Turning to the economic news of yesterday, the Labor Department released its regular weekly unemployment claims with initial claims falling 16,000 to 378,000 coming in right at expectations. Moving on, the Conference Board reported its Leading Economic Index noting a rise of 0.6% with it also coming in right at expectations. So it was a day of meeting expectations with no reports, foreign or domestic, materially impacting equities.

This morning things are beginning quite well the Dow up 11 primary on the heels of European equities which are materially stronger with London’s FTSE up 1.58% and France’s CAC 40 up 1.47% led by gains in materials, energy and financials.

It’s been a long time since I’ve discussed Greece. A couple of years ago it, more specifically its debt, was in the news every day. Well things are improving there. There are still major challenges, not the least of which is pension reform, but data is showing that the country in recent months has run a financial surplus of 2-3%, if you don’t count the interest on the national debt (funny, my lenders always consider that!). This is a far cry from the stunning large and rising deficits of years past and is indeed very real progress.

Oil

With the prospect of rising interest rates and the resulting rising dollar WTI was down as much as $1.46 yesterday, but a funny thing happened. It closed down only 3¢, at $48.16. Brent closed down 12¢ at $48.81. Note the two oil are just about at parity which with rare exception over the past few years has not happened. WTI has been getting bid of late relative to Brent due to the wildfires in Canada. The fire is monstrous encompassing 1,900 square miles but on the positive side the winds have shifted once again to the west pushing the fires away from the oil sands facilities. Additionally, rain is finally being forecast for the region which shall be of immense help.

As you know, I always watch the term structures and the contango in WTI has narrowed appreciably with the July ‘16/’17 spread going from $3.45 a month ago to $2.54 last week to currently $2.09. This is bullish. However, some of this I’m sure is due to the wildfires so we’ll have to see how the curve moves once the wildfires are contained.

This morning the bears are out with WTI down 62¢.

Blog Weather 5-20-16
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Information Systems LLC

Natural Gas

The June natural gas contract closed up marginally, 3.8¢ at $2.039, but what caught my eye was all the other contracts closed materially higher with the July, August, September and October contracts up 6.4¢, 7.3¢, 7.8¢ and 8.3¢, respectively. It looks like no one is excited about owning the near month with storage levels so high but are wanting to own the months where the air conditioning load really kicks in. Yesterday the EIA released its storage report stating 73 Bcf was injected into storage last week which compares to last year’s 98 Bcf injection and the 5 year average of 91 Bcf. I fully expect this trend to continue with demand increasing and production flat to down. If we hadn’t had such a warm winter last year natural gas would be trading 50¢ higher.

Here’s some very good news. Due to one of the effects of the El Nino which typically is more precipitation along the U.S.’ west coast, California Governor Jerry Brown has lifted its statewide mandate to cut urban water use. A year ago Governor Brown ordered urban districts to cut water use by 25% statewide. The move doesn’t mean a free-flowing tap for everyone being that individual districts can set their own targets based upon local needs. This means that parts of the state, primarily those in the northern part of the state which received much more precipitation than the southern region, will have no local restrictions.

This morning natty is 2.5¢ higher. Chatter.

Elsewhere

My would it be nice to be able to do what Daniel Craig just did. For those few of you who don’t know, Daniel Craig is Bond, James Bond. Well, he plays the character. And he’s tired of doing so. He just turned down $100 million to play the British Secret Service agent in two more films. Per Time Out magazine he said that “I’d rather break this glass and slash my wrists” than do another Bond movie. Now as unusual as this seems it’s not unprecedented. Jerry Seinfeld reportedly turned down roughly $100 million to make another season of Seinfeld and Keanu Reeves reportedly backed out of an $11 million deal to star in Speed 2. Heck, those guys don’t even need to play the lottery!

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