With a hat-tip to birthday boy Scott Bakula, risk-on markets have made a quantum leap higher this week, and are continuing this trend today. Broader markets are full of the joys of spring fall as we move into the full throes of earnings season, with headlines touting the strong rally in global equities this week.
‘FTSE on course for the biggest weekly rise for nearly four years‘ emphatically bellows one headline about the UK, while ‘Asian stocks rise for seventh day in eight’ cries another. Waning expectations of a Fed rate hike has helped to sponsored this recent bout of optimism, and yesterday’s dovish Fed minutes only served to further endorse this belief.
The unraveling of these expectations has led to an unwinding of U.S. dollar strength and a correspondingly strong rebound by emerging market currencies. Given the weaker dollar / stronger oil relationship, the crude complex in the last week has shown strong upside amid an emerging market currency rally:
On the economic data front, France has continued its recent rich vein of form with industrial production rising +1.6 percent in August versus an expectation of +0.5 percent; the biggest monthly gain in nearly 2 years. To offset this euro-centric industrial positivity, Italian industrial production came in worse than expected at -0.5 percent (versus -0.3 percent expected). In the U.S., both import and export price indexes came in negative, although the -0.1 percent seen by the import price index was better than the -0.5 percent expected. Related: Can The Panama Canal Fulfill Its Global LNG Promise?
Let’s check back in with retail gasoline prices. The onset of refinery maintenance and a rise in oil prices has quickly been reflected through to retail gasoline prices, with the national average seeing its downward trend halted, treading water at ~$2.30/gal.
A study just out has countered the belief that savings at the pump are not finding their way back into the economy. A JP Morgan study concludes that 78 cents of every dollar saved on gasoline is spent by individuals, with about 18 percent of that going to eating out and 10 percent to groceries. Previous studies had indicated that the majority of this windfall was going into savings accounts and to pay down debt.
While the national average has been flat-lining, the onset of strong refinery maintenance in the Midwest has meant that Chicago prices (hark, red line above) are seeing a counter-seasonal bounce. As the chart below of PADD2 refining illustrates, utilization has dropped to 79.2 percent, well below the 91.1 percent seen for the same week last year, and at the lowest percentage since May 2013:
Finally, the below chart reminds us to remain humble, for energy markets are impossible to predict. Five years ago, super-high Asian LNG prices and the prospect of ongoing stellar demand encouraged a wave of LNG terminals to be planned. Take a quantum leap forward five years to the present, and 85 of these 90 planned projects appear to be surplus to requirements.
IEA predicted global demand would climb by 16 percent over five years to 2016, but it now only projects growth of 11 percent. This demand-side weakness comes amid seven new plants coming online from Australia in the next two years, while U.S. LNG exports are about to start this quarter from Cheniere’s Sabine Pass terminal in Louisiana. All the while, Asian spot prices have dropped from close to $20/MMBtu from early last year down to below $7/MMBtu, making the majority of LNG exports uneconomical. Tough times indeed. Related: Official: America Has A New #1 Supplier Of Uranium
By Matt Smith
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