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Morning Energy Blog – May 26, 2016

Equities and the economy

I’ve been travelling on business the last two days, and maybe I should do it more often, because the last two days have been fantastic for equities, and your 401K! After posting a huge gain of 214 points on Tuesday the Dow added another 145 points yesterday marking a gain of 359 points, 2.0%, over that past couple days. That’s big folks! And take it every time! The drivers on Tuesday, which was the day of the big move, were positive economic news from Europe with the economy there performing better than expected and strength in the energy market which I’ll discuss below. The other two major indexes performed just as well yesterday with the S&P 500 rising 14 points, 0.7%, to end at 2,091 and at its highest close since April 27th. The Nasdaq rose 34 points, 0.7%, to finish at 4,895. A very interesting thing is happening and it’s not statistical but sentiment and that is the market is beginning to view the expected rise in interest rates by the Fed as a vote of confidence in the American economy rather than negative for corporate earnings. This is a HUGE and very, very important change for the market, and very bullish.

The only economic report of significance yesterday was Markit’s “flash” Services Purchasing Manager’s Index which fell to 51 from 52 which came in at expectations and importantly, still above the all-important 50 level indicating growth.

Overnight the Asian markets all closed higher although the gains were very marginal. The European markets are trading flat to ½% higher and the Dow is down 23. Folks, the market needs a breather. You should expect some pause, some consolidation. The troops need to bivouac before moving on.

By the way, happy birthday Dow! You are 120 years old today!

Oil

Oil has been VERY strong lately. Yesterday WTI popped 94¢ closing at $49.56 and Brent skyrocketed $1.13 finishing at $49.74. Oil prices got a boost from yesterday’s DOE crude and products report showed an aggregated (crude, gasoline, products) decline inventories of 3.4 million barrels of 3.4 million barrels with the actual amount being 3.4 million barrels. Additionally, the 5 year average has been only a 0.82 million barrel withdraw so this added to an already bullish sentiment. WTI’s strength is showing up in the shape of the curve. Whereas 6 months ago the 1st/2nd month contango was $1.25 it is now 40¢. I’ve been telling you for weeks now the shape of the curve, i.e. spreads, was pointing bullishly.

Supply disruptions are behind the price strength. Per the EIA, Nigeria’s production has fallen 0.7 million bpd due to terrorist activities; Canada’s has fallen 0.6 million bpd due to the wildfires; Libya’s has fallen 0.5 million bpd due to the civil war there; and Venezuela’s has fallen 0.3 million bpd because the country is run by very poor leadership who’s driving the economy into a large and deep abyss. This totals 2.1 million bpd which puts the global supply/demand balance about at even.

Overnight both WTI and Brent both traded over $50 which is the first time since last November. However, prices have backed off with WTI now up just 5¢ at $49.61. I was looking at the open interest, that is the speculative longs and shorts, and the boat is listing some to the long side so the bulls need to be careful here.

Blog Weather 5-26-16
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Information Systems LLC

Natural Gas

Front month natural gas prices have eroded lately experiencing a 20¢, 9%, decline in less than a week. Yesterday the June contract eked out a gain of 1.2¢ settling at $1.992. That being said, the calendar strips remain strong. A couple of weeks ago cal ’17 was trading at $3.00 and retreated to about $2.85 but is back close to the $3 level with it settling at $2.967 yesterday. The bulls will get some help the next 10 days with some very warm weather hitting the upper Midwest and east coast, however, the 11-15 day forecast is very bearish with some materially cooler weather coming into the region. That forecast is weighing on the bull’s yoke with the June contract trading 4.5¢ lower.

Today the EIA releases its weekly storage report with the market looking for an injection of 66 Bcf for last week.

Elsewhere

Regarding Venezuelan, things are a mess there. There are shortages of everything right now. People are lining up for blocks to buy groceries. When they can get something that’s not been available, it’s rationed. For example, citizens waited hours to get two packs of toilet paper, two kilos of corn flower and two packs of baby diapers. There are also long lines at pharmacies for medicine, which are rare commodities. A pair of Nike shoes cost 50,000 Bolivars. A very well paid worker, such as a manager at a large company, makes 150,000 to 200,000 Bolivars a month. You do the math. And that is for the very top paid workers. The murder rate in Venezuela is now one of the highest in the world. Caracus is a ghost town at night. No one goes out after dark unless absolutely necessary. There are almost no police on the streets at night and there is almost no impunity. Only 2 out of every 100 murders or robberies are solved with people sent to jail. Due to either, or both, the El Nino that caused a drought there or lack of maintenance of the Guri Dam, which supplies a very material amount of Venezuela’s electricity, citizens and businesses only have electricity every other day. I could go on. It’s bad there. Very bad. And very, very sad.

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