Note: Tomorrow will be the last Morning Energy Blog until Friday August 21st. The author is taking a long overdue vacation with his daughters.

Equities and the Economy

U.S. stocks had a great day yesterday (finally) closing near their highs for the day. The Dow shot up 242 points, 1.39%, at 17,615, the S&P 500 climbed 26 points, 1.27%, finishing at 2,104 and the Nasdaq ended at 5,102, up 58, 1.16%. There were numerous factors that brought buyers into the market. We can start with Fed Vice Chairman’ Stanley Fischer’s comments telling Bloomberg TV he doesn’t expect the first interest rate hike by the Fed in more than 9 years to occur until after inflation returns closer to the Fed’s target of 2%. Inflation has dipped close to zero in recent months and hasn’t been above 2% since April 2012. Interestingly, he noted the U.S. economy is in an extremely anomalous situation with employment rising pretty fast relative to previous performance yet inflation is very low. He believes a large part of the current low inflation environment is temporary though driven by falling oil prices. Investors interpreted his comments that there was a lower probability of an interest rate hike in September which is bullish equities. Another factor was oil prices rose yesterday which means oil companies balance sheets improved which means their stock price should be higher, all things being equal, which brings in buyers and pushes the major indexes higher. Thirdly, as I mentioned yesterday, equities had posted losses for 8 consecutive sessions and the market was oversold and due for a bounce.

Let’s move on to this morning for the equivalent of a tsunami has hit the currency markets and its being felt in the equities and bond markets around the world. Setting the stage, remember I stated in yesterday’s report that over the weekend the economic news from China was quite ill with producer prices at 6 year lows and exports dropping faster than a rock in water, and yet China’s Shanghai shot up a huge 4.92% on the day. Why? Anticipation of more QE from the Chinese government. And boy did the Chinese government come in hard. While you were sleeping the Chinese government decided to let the yuan float more freely which resulted in the yuan falling 1.8% relative to the U.S. dollar. That’s the biggest single day move in the yuan in 20 years! Now you need to understand that a major countries currency changes 1.8% maybe in a year or maybe even several months, but moving 1.8% in a day is analogous to getting hit with a level 9 earthquake. Additionally, it caught everyone by surprise (unlike our Fed’s endless communication interest rates are going to rise). The move has sent global stock prices tumbling and didn’t even boost the Chinese Shanghai, which one would believe would happen being it’s a huge economic stimulus, with the index closing flat to Monday’s close. The other Asian bourses, Japan’s Nikkei 225 and Hong Kong’s Hang Seng, closed lower and European stocks are feeling the pain all trading materially lower with Germany’s DAX down a huge 2.32%. U.S. equities are getting hit hard as well the Dow down a stinging 181 points, 1.03%. Bonds are rallying as investors move out of riskier assets such as equities into safe haven financial instruments.

Oil

As previously mentioned, oil finally found a bid yesterday with WTI closing $1.09 higher at $44.96 and Brent settling up $1.80 at $50.41 and once again over the psychologically important $50. Oil prices rose after data was released showing Chinese crude imports rose to 30.71 million tons in July, a gain of 4.1% on the prior month and a big 29.3% higher than July 2014. You can throw that all out this morning for with the devaluing of the yuan and the U.S. dollar stronger commodities are getting punished including oil. WTI is down a whopping $1.57 as I write. Traders are interpreting the yuan weakening as recognition by the Chinese government that economic growth is clearly under pressure and the extant of the slowdown could be more acute than the headline data is revealing. And when things aren’t going so well in the world’s second largest economy commodity prices get hit.

Fundamentally, one of the key factors pushing oil prices lower is that the precipitous drop in the rig count, 60% less than the high last year, is not materially impacting U.S. production. Why? Because U.S. oil producers are getting so much better at “manufracturing,” productivity is improving by leaps and bounds. For example, Anadarko Petroleum reported they can now drill twice as many wells this year than last using the same number of drilling rigs. Or consider Mr. James Volker’s, CEO of Whiting Petroleum which is the largest shale producer in North Dakota, comments that Whiting is now prepared to “run and grow at $40 to $50” per barrel. Whiting pumped a record 170,000 bpd in Q2 2015.

Courtesy of MDA Information Services LLC

Natural Gas

On the heels of a warmer weather forecast natural gas prices rose yesterday closing up 4.4¢ at $2.842. Models are showing above normal temperatures coming to the northeast in the 6-15 day time frame and this brought in buyers. Here in Texas ERCOT is rocking with a new record demand on the grid yesterday at 69,783 MW’s. That record will be broken today. The forecast for Houston is for the city to hit 104 degrees which is 2 degrees above the record high and everywhere in the state it’s stifling hot. In all likelihood, today’s demand will be the high not only for August but for the summer and 2015 year. While still above, temperatures tomorrow will be lower than today and are forecasted to begin moving toward normal. This morning natty is down 3.2¢. Chatter.

Elsewhere

Climate change is continually in the news and the Obama Administration just released standards to reduce CO2 and other emissions by 2030. Well the electric generation has been doing its part. In April 2015 the electric power sector emitted 128 million metric tons of CO2 which is the lowest level for any month since April 1988, per the EIA.

Two fuels, coal and natural gas, account for almost all the CO2 emissions from the power sector. In April 2015, electricity generation from both coal and natural gas fell from their March values, but because coal fell more than natural gas (18% versus 6%, respectively) generation from natural gas surpassed generation from coal in April. Natural gas plants are now about 25% to 39% more efficient than coal plants in terms of energy needed to produce a unit or electricity.

Significant changes in the U.S. electric generation mix have occurred over time. Comparing April 1988 to April 2015 (27 years) natural gas consumption in the sector has more than tripled, renewable generation more than doubled, nuclear generation increased 47% and coal consumption has decreased 17%. Bottom line, electricity generation has become less energy and carbon intensive over time. As Martha Stewart would say “That’s a good thing.
Have a good day.