Another Fun Day in the Market

Jim Brown
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The equity markets finished on their lows with critical support breaks on the Nasdaq and Russell 2000. This is setting up for a rough end to the quarter.

Historically the last week of March is negative 71% of the time. This is attributed to fund managers shuffling their portfolios ahead of quarter end. They are exiting those positions they held over the end of the tax year and setting up for the April earnings and "sell in May" cycle.

In the energy sector crude inventories spiked again by a whopping 6.6 million barrels and the biggest increase in more than eight weeks. Analysts were only expecting an increase of 2.9 million.

Over the last four weeks we have seen inventories rise by 20 million barrels. That is highly unusual. We expect inventories to rise this time of year but this is very out of character to be this large. We should see a smaller boost next week because of the shutdown of the Houston ship channel by the barge collision and oil spill. The channel was shut down for several days and that means a lot of tankers have been holding out in the Gulf and unable to make their delivery.

The inventory boost was helped by a +308,000 bpd increase in imports. Refiners increased utilization slightly to 86% but crude demand only rose +141,000 bpd. U.S. production declined slightly by -25,000 bpd.

Cushing inventories declined by -1.3 million barrels to 28.5 million and the lowest since February 2012.

Gasoline inventories declined by -5.1 million barrels and the second biggest decline in eight-weeks. Gasoline demand soared to 9.0 mbpd, an increase of +490,000 bpd. Apparently the warm weather has enticed people out of their homes as well as stimulated additional business activity. Imports rose +207,000 bpd and production declined -213,000 bpd. We expect gasoline inventories to decline this time of year as refiners try to flush all the winter blend fuels out of inventory.

Refiners boosted distillate inventories slightly with a gain of +1.6 million barrels. However, helping to boost diesel inventories was a very sharp drop in demand from 4.16 mbpd to 3.48 mbpd. That is a huge -683,000 bpd decline in just one week. That is the weakest demand in more than two months. There was nothing obvious in the past week that gives us any clue why demand fell so sharply. Imports only declined -37,000 bpd and production rose by 17,000 bpd.

We have to assume the sharp drop in distillate demand may be an accounting shortfall. There are hundreds of inventory reports submitted every week and it is always possible that a couple were missed or there was an error in the process. If this is the case we should see the numbers reverse next week.

The spike in gasoline demand may have been helped by the arrival of spring break. Millions of kids in the U.S. are headed to the ski areas or the beaches and most will drive to maximize their available cash. Also, spring baseball season has started and tens of thousands of fans are headed to the warmer climates to watch their favorite teams compete. This is a temporary 2-3 week bounce in demand but a prelude to what we will see in late May as summer vacations begin.

Propane inventories declined to 25.658 million barrels and the low for the year. The propane heating season is basically over and it is one residential customers will remember for a long time.

One of the biggest problems for propane users was a 94-year old law that prohibits the shipping of products between U.S. ports by non-U.S. ships. That means a tanker from South America can't load propane in the Gulf of Mexico where it is plentiful and float it to New Jersey where propane is needed.

However, a U.S. tanker can load propane in the Gulf and ship it to Europe. Another tanker can load propane in Europe and ship it to New Jersey and sell it for a lot more money.

When supplies were tight over the winter the heavy demand area in the Northeast was buying propane from Europe for $121 a ton more than it cost in the Gulf. Supplies in the Northeast declined to only 1.6 million barrels and the lowest level since 1994.

This is a law that needs to be changed. There are no valid reasons to prevent shipping from port to port by any freighter or tanker. In a free enterprise system we are supposed to be able to buy and sell to anyone. If an enterprising tanker owner wants to make a business of shipping propane from Houston to New Jersey in the winter months then he should be able to do so.

The Jones Act was signed in 1920 and requires all domestic cargoes to travel on U.S. built, owned and crewed vessels. The limited supply of these vessels today has pushed up rental rates to the point that it is actually cheaper to buy propane, heating oil and some other fuels from overseas sources rather than buy U.S. produced and shipped products.

The National Propane Association tried to get Jones Act Waivers to ship propane by ship when supplies were tight but were only successful in getting prioritized pipeline shipments and longer hours approved for truck drivers. The U.S. Maritime Association, part of the Dept of Transportation, claimed the Jones Act had not affected the supply of propane. The association said the Jones Act protects U.S. vessel operators, mariners and shipyards vital to national security. That sounds like a union argument to me.

Exports of heating oil from the southern ports are near record levels but the Northeast is importing equal amounts from Europe. It is crazy to sell from the south and import the same products in the north.

Fadel Gheit, energy analyst at Oppenheimer, said revoking the Jones Act would lower the cost of gasoline by as much as 15 cents and reduce the cost of other fuels as well.


The Nasdaq broke below critical support at 4,200 and now appears headed for a retest of 4,100 or even 4,000. The Russell 2000 broke below critical support at 1,170 with a massive -2% loss on Wednesday.

The indexes could turn on a dime tomorrow as a result of the bank capital rules released by the Fed after the close but I am not holding my breath.

The last week of March is seasonally negative about 71% of the time. There are various factors at play including the end of the quarter portfolio rebalancing. I believe the market will go higher in April but this week appears to be following the seasonal script.

Jim Brown

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