What a Difference a Day Makes

Jim Brown
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A couple of economic numbers and an analyst comment or two can quickly change the outlook for a sector and a market. WTI has gained $5 since last Wednesday's lows at $86.36 and nothing has really changed in the economic outlook. The expectation for additional stimulus by the ECB was the fuel for the rally.

In continuing with the fundamentals don't matter theme the economic reports from Germany, France, the U.K. and China all disappointed this week but commodities celebrated since it is almost certain the ECB will cut rates as a result. Don't fight the Fed, BOE, BOJ and now the ECB.

The Markit PMI for France gained only +0.4 from 44.0 to 44.4 in March. Anything under 50.0 is still contraction territory. The Markit Services PMI for France rose from 41.3 to 44.1. That was significantly better but still well into contraction territory. Germany's manufacturing PMI came in at 47.9 and services PMI at 49.2. The Eurozone Composite Output Index was unchanged at 46.5 for April, also well into contraction territory. Markit said "The survey is signaling a worrying weakness in the economy at the start of the second quarter, with signs that the downturn is more likely to intensify in the coming months rather than improve."

The economic news was so bad that investors were sure the ECB would cut rates at next Thursdays meeting and possibly launch its own version of QE. European Commission president Jose Manuel Barroso was quoted as saying austerity "has reached its limits."

China's Shanghai Composite fell -2.6% on Tuesday after the April HSBC Manufacturing PMI fell from 51.6 to 50.5 and very close to contraction territory. Estimates had been for a minor decline to 51.4. The export index declined to 48.6 and exports are a major portion of China's economy. Exports are in contraction and that suggests manufacturing will follow.

Analysts today said the consensus is building for a rate cut from the current .75% to .50% but they believe more stimulus will be needed. The ECB put one trillion euros into the banks two years ago with the LTRO programs. The banks have already paid back 25% of that amount but this has lowered excess capital in the banks from 600 billion euros to 300 billion and this is considered to be too low if there was another financial dip. The ECB might offer up some new "QE like" program to put more money back into the system.

In the U.S. today there was limited economic data but what we did have was not good. The Durable Goods orders for March fell -5.7% compared to a +4.3% rise in February. The number sounds really bad on the surface but the majority of the drop was aircraft orders. Orders for transportation equipment declined by 15% and nondefense aircraft fell by -48.2%. It was all Boeing. They received orders for 179 planes in February and only 39 in March. If you remove the aircraft orders the durable goods orders declined only -1.4% but that was still a sharp decline. It should not be bullish for oil prices. This should worsen in the months to come because of the sequester impact.

Oil Inventories

Oil inventories saw a gain of +900,000 barrels for last week but that was less than the 2.0 million analysts expected. Refinery utilization fell sharply from 86.3% to 83.5% as additional units went offline for spring maintenance. This reduced refinery demand by 586,000 bpd. In theory this should have pushed inventory levels higher but it may not be reflected until next week.

Gasoline inventories declined sharply by -3.9 million barrels. The drop in refinery utilization and a sharp increase in gasoline demand of +367,000 bpd were the driving factors. The flushing of winter blends out of the storage system was also a factor. Refiners only have a week left to unload the winter blended gasoline and complete the shift to summer blends as mandated by law. Refineries switch blends in the March and April period. Pumping stations upstream in the pipeline structure have to switch to summer blends by May 1st. Gasoline stations have until June 1st to complete the switch. The entire process reverses on September 15th.

Distillate inventories rose only +100,000 barrels. The prior week they shot up by +2.4 million. Refiners produced -197,000 bpd less than the prior week and imports declined by -183,000 bpd. With refiners and imports both lagging I would have expected a decent decline in inventory levels but demand declined as well by -38,000 bpd.

U.S. crude production rose to 7.326 mbpd and a new 20+ year high. This is the third consecutive weekly high. Gasoline demand also rose sharply to 8.75 mbpd and the highest level since November 16th.

Active gas rigs have risen slightly for the last two weeks but are still well below levels just two months ago. The 375 number on April 5th was a 13 year low.

Inventory Snapshot

Oil Inventory Chart

Gasoline Inventory Chart

Distillate Inventory Chart

Gasoline prices declined only a penny over the last week despite the big decline in crude prices. The average retail price was $3.54 as of April 22nd. That is -33 cents below the year ago levels. Gasoline has declined about -25 cents over the last eight weeks. Once all the refiners end the spring maintenance and begin filling up the supply chain again we should see prices fade a little more before the summer rally. Diesel prices fell -6 cents to $3.89 per gallon. This is down -27 cents over the last eight weeks.

Earnings Today

Hess Corp (HES) reported adjusted earnings of $1.95 compared to analyst estimates of $1.59. Revenue rose +39% to $4.12 billion. Production fell -2% to 389,000 boepd due to asset sales and lower output in Norway. Bakken production rose +55% to 65,000 boepd. They expect that production to remain flat in May due to a large and growing inventory of wells that have been drilled but not completed. Winter in the Bakken is a miserable experience. Now that spring has arrived the completion cycle should accelerate. Hess expects to average 5% to 8% production growth in the years ahead. Hess received an average of $94.50 for oil and $6.62 for natural gas in Q1. The company said it was resuming buybacks under the existing $4 billion share repurchase program. Hess shares gained +3% on the news.

Hess is in the process of splitting off its refining business and the parent company will be solely focused on exploration and production. Conoco and Marathon have already completed the same process. Hess has already sold $3.4 billion in assets as it works toward this goal.

Flowserve (FLS) reported earnings of $2.01 that increased +18.93% and beat analyst estimates of $1.94. Revenue was $1.1 billion that missed estimates of $1.11 billion by an inconsequential amount. The company reaffirmed the full year estimate of $9.60 to $10.60. Bookings of $1.2 billion increased +9.9% over Q4. They repurchased $173 million in shares in Q1 and expect to buy another $150 million in Q2. Flowserve shares gained +2.35 on the news.

Whiting Petroleum reported earnings of 94 cents that beat the estimate by 4 cents. Revenues rose +8.8% to $613.4 million and beat consensus of $590.1 million. Whiting expects Q2 production to be 8.35 mboe and full year production to be 34.4 mboe. Shares rallied +3% on the earnings.

Cabot Oil and Gas (COG) reported earnings of 26 cents that increased +86% over the year ago quarter. Analysts were expecting 24 cents. Revenue rose +37% to $373.29 million. The company said active drilling in the Marcellus Shale allowed the company to post record operating profits, quarterly production and operating and discretionary cash flows despite low prices for natural gas. Analysts are raising estimates for Q2 and the full year on Cabot. Shares rose $1 on the news.

Reporting on Thursday are XOM, CAM, COP, CRR, DO, HERO, HP, IMO, NBL, NR, PTEN, PTR, RRC, and SNP. Friday earnings include CVX, NOV, PBR and TOT.


The equity markets traded sideways on Wednesday. The Nasdaq gained +0.01 and the S&P +0.32 points. I don't think you can get much flatter than that. The Dow lost -43 thanks to a monster drop in its forecast for next quarter. The company lowered guidance for the current quarter to 69-77 cents and analysts were expecting 82 cents. PG guided for the full year to $3.96 to $4.04 and analysts were expecting $4.37. PG beat estimates by 3 cents for Q1. The company blamed the lowered forecast on "choppy" market conditions and a botched restructuring plan in China and India. PG shares fell nearly $5 and that knocked -40 points off the Dow.

AT&T reported earnings Tuesday evening and they lost share and profits to Verizon. Shares of Dow component AT&T fell -2. JNJ and WMT each lost more than a buck to further weigh on the Dow.

Boeing (BA) was the winner with a +2.65 gain to help Microsoft (+1.16) and McDonalds (+1.26) offset the drag of PG and AT&T.

The S&P struggled at 1580 for the second day but at least it did not give back the rebound gains from the prior week's decline.

As the month of April draws to a close we should see some window dressing by fund managers. Once into May the trend for the last three years is a -10% decline. Trends are history not gospel but traders should be cautious about long positions once into the new month.

Jim Brown

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