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Morning Energy Blog – August 1, 2016

Equities and the Economy:

The S&P 500 barely missed a record closing high Friday and the Nasdaq booked its best finish in more than a year as Wall Street shook off a horrible Q2 GDP number. The S&P closed up 4 points on Friday at 2,174, just 1 point shy of the previous Friday’s all-time closing high of 2,175. The Nasdaq gained 7 points on Friday to close at 5,162 marking its best closing level since July 22nd. The tech-heavy index had a great week and month gaining 1.2% for the former and 6.6% for the latter. The Dow fell on Friday, 24 points, to close at 18,432 for a weekly loss of 0.8% but had a very good month up 2.8%. Earlier in the day the Commerce Department released second quarter GDP data which came in at 1.2%, way below economists’ forecast of 2.6%. However, drilling down into the data it wasn’t as bad as the headline number. The underperformance was driven by an unusual 1.2% detraction from inventories so excluding this number GDP would have grown at a more respectable 2.4%. The inventory drag will provide a sharp base effect bounce in later readings. Other data was that consumer spending in Q2 was a robust 4.2% and given that 70% of GDP is consumer spending, things are ok. Overall, the data shows the economy is chugging along in a fairly steady recovery. Q1 GDP was revised downward form 1.1% to a horrible 0.8%. Very importantly, the Q1 and Q2 GDP data will mean the Fed will be in no rush to raise interest rates.

Asian markets closed mixed overnight and the European markets are on the defense with all three major indexes trading lower. Fortunately, here in the U.S. we’re faring better with all three major indexes trading at about last Friday’s close.

Oil

Oil prices closed mixed on Friday with WTI gaining 46¢ closing at $41.60 but Brent lost 24¢ settling at $42.46 with both oils falling 6 out of 7 days. Both oils touched new 3 month lows either on Thursday or Friday. It was a very bad month for oil with the both benchmark indexes falling about 14.5% for the month. The reason for the falling prices was released in a Reuters report on Friday which stated that OPEC’s production in July reached its highest level in recent times at 33.41 million bpd which compares to June’s 33.31 million bpd. High production from Iraq, Saudi Arabia and Iran as well as Nigeria despite militant attacks on its oil infrastructure boosted production. Furthermore, drilling here in the U.S. is rebounding. Baker Hughes reported on Friday the oil rig count rose another 3. This is the 5th consecutive week the oil rig count has risen. Drillers added 44 rigs in July, the largest monthly increase in over two years. The price of WTI has now dropped more than 20% from last month’s near one-year high of just below $52. Further disappointing the bulls, the dollar last week fell about 2% vs. a basket of currencies and that didn’t help oil prices at all.

This morning it looks like it’s going to be a 7th consecutive day of losses with WTI down 95¢.

Blog Weather 8-1-16
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Information Systems LLC

Natural Gas

Traders took Friday off after Thursday’s huge jump in prices on the heels of a bullish EIA storage report with the September contract closing up a meaningless 0.3¢ at $2.876. Natural gas continues to set record consumption in the electric generation sector. A new record was set on July 25th at 41.6 Bcf/d marking the second week in a row in which daily power demand pushed to a new record and exceeded the 40 Bcf/d mark. Furthermore, the power sector demand last week saw there consecutive days above 40 Bcf/d. Power burn in the Southeast also set a new record at 12.6 Bcf/d.

The weather forecast continues to show above normal temperatures in the 6-15 day time period, but traders aren’t excited with natty down 5.9¢

Elsewhere

The oil and gas industry may seem like a prosaic, old-guard business but it is one of the largest drivers of developing technology. I’ve mentioned innumerable times how technology has improved oil and gas exploration which helps keep prices low including horizontal drilling and hydrofracturing being just two examples. Here’s another example of the results of technology in the oil patch. A year ago it took U.S. drillers 18-20 days to drill a well in the Bakken. Now, 13-15 days. Also, we can “see” underground far more efficiently and far more effectively than we could in years past using seismic technologies. I bet you didn’t know this but the oil and gas industry has been a huge driver of developing digital recording technology. According to Mr. Robert Hardage of the University of Texas Bureau of Economic Geology, in the 1970’s there were several seismic contractors, but one company dominated the business. They were the Microsoft of their time. The company was Geophysical Services, Inc. (GSI) and they were one of the earliest developers of digital seismic recording technology. This is the time when solid state electronics were coming on the scene. GSI decided that it needed to create its own internal company to build solid state devices it needed for its seismic recorders. They named the company their newly created company Texas Instruments. Texas Instruments currently is dominant in the digital industry. GSI, not so much for it no longer exists which no one ever thought would happen. So the next time you use your cell phone know that it had its roots in the oil and gas industry.

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