Good Morning. Yesterday was the antithesis of Tuesday. A bad day. A very bad day. The S&P 500 traded up to the level I mentioned in my Report on Tuesday, 1,949 (technically I said 1,930 to 1,943 but most definitely close enough), and failed. We actually traded marginally higher in the morning, as high as 1,949, and then it began to slip, then slide, then capitulate. The market closed on its lows. Definitely not a good omen, at 1,927, down 12. The Dow lost a material 153 to 16,461 and the Nasdaq fell 36 at 4,382. Blame Boeing and Biogen Idec. After the aircraft manufacturer and biotechnology company posted earnings it was Led Zeppelin with the levee breaking. Boeing ended down 4.5% and Biogen down 5.4%.

The news wasn’t all bad yesterday. The Labor Department released its Consumer Price Index for September showing it edged up only 0.1% last month. A rise in food and shelter costs was offset by a decline in energy prices with the latter falling for the 3rd consecutive month. Inflation has waned in recent month after quickening in the second quarter as the dollar has gained strength and growth has slowed down in China and the eurozone. With the benign inflation the Fed may have a reason to delay raising interest rates with the current expectation being that will occur next summer. The Fed meets next week for 2 days and once again it will be time to parse their post meeting communique.

The Asian markets all got whacked overnight following U.S. markets lower but the European markets are flat to higher. Helping the market (us!) were Purchasing Manager Index reports released overnight from China, Japan and the eurozone which all came in better than expectations. Add to that Caterpillar, GM and 3M all reporting earnings better than expected (although AT&T came in worse). GM’s Q3 sales were the best since 1980. All that positive news is pushing Dow futures up a very, very nice 157 points. As I’ve said before, let’s see how we close. There have been more days than I can count where the market looked great the first half of the day then rolled over the second half.

After trading in a relatively narrow range for the past few days oil prices continued their descent yesterday. Brent dropped $1.68 closing at $84.56 and WTI lost $1.97 settling at $80.52. WTI settle at its lowest level since November 19, 2013 and the low trade of the day, $80.22, was the lowest since June 2012. Brent is trading only a couple of bucks above its low last week of $82.60 which was its weakest since 2010. The impetus for the drop in prices? The weekly EIA crude and products inventory report yesterday. The market was looking for an aggregated (crude + products + distillates) build of 1.0 million barrels. The actual number? 6.93 million barrels! The bulls landed on a “slide” space in Chutes and Ladders. WTI is now down 25% from its June peak. This morning WTI is getting a small bid on the positive PMI data and stronger equities trading up 63¢. I still believe we’re going to see the mid $70’s.

Natural gas was very quiet yesterday with the whole day trading in a 6.7¢ range ending on the low end down 5.2¢ at $3.659. The weather forecast is the matador and every day that we come in and the forecast shows above normal temperatures is another day we can reduce the storage deficit. As you can see below, this week the midcontinent will be challenging record highs which this time of year means no load. And next week is more “no load”. Speaking of storage, today is EIA natural gas storage report day and the market is looking for an injection of 96 Bcf which is, once again, materially greater than last year, 86 Bcf, and the 5 year average, 70 Bcf.

Returning to oil, falling prices are testing investors’ commitment to the Wall Street funded shale boom. Energy stocks led the plunge earlier this month in U.S. equities and borrowing costs rose. The Energy Select Sector Index is down 14% since the end of August compared to 3.8% for the S&P 500. That’s more than any other industry sector. The drop wiped out $158.6 billion of market value of 75 shale producers. Another effect of the price drop is higher borrowing costs. The yields for 190 bonds issued by U.S. shale companies increased by an average of 1.16% points.

What distinguishes this boom from others is the way oil and gas companies are being funded. According to the IPAA, in 1994 drillers funded 42% of their own capital budgets. Today shale companies are outspending their cash flow by 50% thanks to borrowed money and they’re selling more than twice as much equity to the public as they did 10 years ago. For example, the yield on the $350 million bond due in 2018 issued by Whiting Petroleum Corp. Jumped to as much as 6.1% on September 30th, the highest in almost 3 years according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. Shale drillers aren’t panicking and that’s because the IEA estimated 96% of U.S. shale oil production remains profitable at $80 barrel. By the way, the shale boom has not only been profitable to producers. Per Bloomberg, investment banks have made a ton, $5.2 billion in advisor fees since 2009, second only to the haul from the financial industry itself.

On a logistical note, the Morning Energy Report will not be published tomorrow for the author is taking a long overdue day off. Have a good day.

Courtesy MDA Information Systems LLC