Market Notes
February/March 2019 Issue 

Risk-on sentiment continues to fuel equities and oil markets.

Since the Federal Reserve came out with dovish comments in January there has been a massive repricing of asset classes, resulting in a plunge in the 10-year yield to 2.6%, a rally in gold, a big rebound of S&P, bringing crude oil along for the ride. Granted, oil prices have been reflecting the enthusiastic production cut from OPEC + friends. But near term its price action characteristic, i.e. relative strength to industrial metals and
abnormally high correlation to the stock market is a giveaway that sentiment rather than fundamentals is the main driving force, now that the Saudi cut and Venezuelan crisis have been baked in.

On the other hand, it is hard to discern how much of the bond + gold rally is due simply to lower-rate expectations or investors hedging. Some even argue that a premature rate cut has been priced in. With low growth, low inflation, no recession, no rate hike, Goldilocks returns. However, all the gains in equity, bond, metals, and oil appear over-extended after the monster 3-month move. After a period of chopping here, volatility may return in the coming quarters.
On natural gas, despite the wild ride this winter, prices ended up where it was the majority of 2018. We think there’s some upside for this commodity this summer and here is our prognosis for our friends at Alpha Week.
I went to the Energy Capital Conference in Dallas in early March. It was great to connect with many new faces in oil & gas and get a download of the state of the industry. With renewed focus on capital discipline, producers are under pressure to live within cash flow and put profit before production gain. Companies looking to exit are finding themselves holding on for longer due to a dearth of ready buyers. With major consolidation largely over, many players are digesting what they have, and smaller companies will have to show more value by proving up their reserves.
Lastly, apart from trading and research, we provide technical advisory services for midstream transactions (past projects here). We have performed due diligence for operators, lenders, private equities, and investors by evaluating asset quality, operations, system design, capital budgeting, project feasibility etc. We can be a valuable resource to anyone needing an expert opinion on pipelines, gas plants, terminals and other midstream assets.


Jeff Lee

CTA, NFA member 499079

Kronos Management, LLC

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