Good morning. Yesterday equities were, to paraphrase Forrest Gump, “like a box of chocolates. You never know what you’re gonna get.” The Dow was down, the Nasdaq up and the S&P 500 flat. The former down 32 to 16,880 and the latter up 20 to 4,463. As I mentioned earlier this week, yesterday began the onslaught of economic data for the week beginning with Q2 2014 GDP, which I mentioned in yesterday’s report, coming in a very strong 4.1%, better than economists estimated. Additionally, Q1 GDP was revised for the better from -2.9% to -2.1%. Still negative, but better and you regular readers know I put a lot of credence in revisions for in good times revisions are for the better and vice versa. Also yesterday the FOMC concluded its two day meeting. There was no press conference scheduled so all investors have is the post meeting communique to parse. As expected, the Fed made their 6th consecutive $10 billion cut to their QE bond buying program staying on pace to end it this October. The Fed also left interest rates unchanged with Fed Chairperson Yellen pointing to signs of a persistent slack in the labor market including low wages. So no surprises there but what was very interesting to me was the comment the “likelihood of inflation persistently below 2% has diminished somewhat.” The Fed is implying their monetary has or will be moving from “easier” to “neutral.” This was the shot across the bow that interest rates will be going up. I’m not saying this year but that’s where we’re heading. Folks, this data is why the U.S. dollar has been climbing recently vs. other currencies and is at a 10 month high. Investors and traders saw this coming via their research (this is the value of research, which is what I and we do for the energy markets!).

Photo: Forrest Gump Suit by Simon Q / Licensed under  CC BY 2.0

This morning is starting out ugly. This morning Argentina defaulted for the 2nd time in 12 years and raising concerns the country’s weakness could spread to the region. I’ve been following this matter for quite a while and this should really be no surprise to the market. Argentina has been trying to restructure a big chunk of its sovereign debt and has successfully done so with most of the bond holds, except for one or two hedge funds who have not agreed and want 100¢ on the dollar. Investors had been hoping for a midnight deal with these hold out creditors but the plan fell through. Anytime a country of any significance defaults on its debt it’s going to hit equities and the Dow is down 120 points this morning. I’m far from an expert in the bond market but being this matter has been on page one of the financial section for weeks if not months I don’t expect contagion.

Oil fell yesterday with Brent taking the brunt of it falling $1.21 settling at $106.51 while WTI end down 70¢ at $100.27. The DOE released its weekly crude and products report and in summary it was somewhat bullish with the aggregate inventories and the subcategory of PADD 2 crude inventories, which is a region in the country including Cushing, OK the crude futures contract delivery point, showing declines greater than estimates. Trumping this data was an OPEC report released yesterday showing production levels were rising. Also heavily weighing on not just oil but all commodities is the very strong U.S. dollar. This morning WTI down 90¢ being carried down the river of lower equities.

September spent its first day as the natural gas prompt, or front, month slipping 3.8¢ closing at $3.786. This was after rising 5.9¢ the day before so it’s all just chatter. After falling for 5 weeks natty has been finding support in the $3.75 to $3.80. There’s a reason for that. This morning is nothing but more chatter with the market basically unchanged (up less than a penny). Today is Thursday. The most exciting day of the week! At least for natural gas traders. It’s EIA storage report day! The market is looking for 94 Bcf injection which is materially larger than last year at this time and the 5 year average (I’ll give you those numbers tomorrow). I wonder if bull meat is any good bar-b-qued? I ask because the weather (below) continues to skewer them!

I’ve discussed the following a very long time ago and thought it would be appropriate to revisit this lesson. Crude oil and natural gas reserves are the estimated oil and natural gas volumes that might be produced at some time in the future. The volumes of oil and natural gas that ultimately will be produced cannot be known ahead of time. Resource estimates change as extraction technologies improve, as markets evolve, and as oil and natural gas are produced. Consequently, the oil and gas industry, researchers, and government agencies spend considerable time and effort defining and quantifying oil and natural gas resources.

For many purposes oil and natural gas resources are categorized into four categories:

· Remaining oil and gas in place

· Technically recoverable resources

· Economically recoverable resources

· Proved reserves

The oil and natural gas volumes reported for each category are estimates based on a combination of facts and assumptions regarding the geophysical characteristics of the rocks, the fluids trapped within those rocks, the capability of extraction technologies and the prices received and cost paid to produce oil and natural gas. The uncertainty in estimated volumes declines across the resource categories (see figure below) based on the relative mix of facts and assumptions used to create these resource estimates. Oil and gas in-place estimates are based on fewer facts and more assumptions, while proved reserves are based mostly on facts and fewer assumptions.

The category into which an oil and gas exploration company reserves are in greatly affects the value of the company. The more proved reserves the more valuable the company. The U.S. Securities and Exchange Commission regulates the reporting of company financial assets, including those proved oil and gas reserve assets reported by public oil and gas companies.

There will be a test tomorrow.

Have a good day.