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Morning Energy Blog – August 24, 2016

Equities and the Economy:

On the heels of a great new home sales report U.S. equities posted marginal gains. The Dow added 18 points to 18,547, the S&P 500 rose 4 to 2,187 and the Nasdaq finished up 15 points at 5,260. Intraday the Nasdaq traded at a record high and the S&P flirted with the same but both backed off at the close. The Dow, while not teasing new highs, was up 100 points early in the day. The S&P continues to chug along yesterday posting its 32nd consecutive session without a 1% move on a closing basis. Per Raymond James, the past 30 days have been the least volatile in two decades.

The Commerce Department reported yesterday that new home sales in July surged to a seasonally adjusted annual rate of 654,000 which is a rise of a whopping 12.4% and the highest level in nearly eight years. This is not only bullish on face value but you also get a “multiplier effect” (remember that from your microeconomics class!) with the consumer having to furnish their new home, landscape it and spend at the local home improvement store. Slightly offsetting that positive data was Markit Economics flash index report for U.S. manufacturing activity for August noting it fell from 53 to 52. As previously stated, this was very marginally negative. The most important point though is the index remains above 50 which indicates expansion. Today we’ll get existing home sales data.

Overnight Asian stocks closed mixed while equities across “the pond” are performing well being up 0.51% to 0.97%. Here in the U.S. the major equities are off slightly with the Dow down 26. .

Oil

The bears were out in force early in the day pushing WTI down about 80¢ on reports that Iraq and Nigeria were ramping up production, and then Iran made its announcement and the market did a hasty about-face. Citing sources in the industry as well as OPEC, Reuters reported that Iran is “sending positive signals” that it may support an OPEC and Russian production cap. Boy, did that report change things. Immediately upon the release either the bears bought to cover or the bulls came in, or both, and oil prices began to rally. And rally they did with a swing of $1.51 from the low closing up 69¢ at $48.10. Brent ended 80¢ higher at $49.96.

We won’t know if OPEC is jaw-boning the market or not (which I think it is, and it’s working, at least temporarily!) or if the group will actually act and follow through on a production freeze. We’ll find out come late September when they meet. What this does do though is keep short sellers from being as aggressive as usual. All I know is if they do enact a production freeze and it supports prices the U.S. producer will gladly pick up the slack, which is why there won’t be a production freeze. Oh, possibly they’ll say they’ll freeze production, but they won’t. There’s only three countries that are players here. 1) Russia. They won’t. They’ve been in a material recession due to sanctions resulting from their move into Ukraine and need every dollar of revenue, 2) Iran. Highly unlikely. They have specifically stated they will not consider a production freeze until their output reaches pre-sanction levels which are ~4.2 million bpd and they’re not there yet, and 3) Saudi Arabia. Historically they are the only nation that has voluntarily cut production to manipulate/raise prices. However, they were able to do that because they were the marginal producer in the world, and as I’ve stated previously, in all commodities prices are set at the margin. The problem for Saudi Arabia is they aren’t the marginal producer any more. The U.S. producer is. Specifically, the U.S. shale oil producer. Additionally, if Saudi Arabia freezes production they fear their arch enemy Iran will simply fill in the gap. And Iran is very much in need of hard cash.

Last night the API released its crude and products report noting U.S. crude stocks increased a huge 4.5 million barrels last week counter to forecasts of a decrease of 100,000 barrels. This was partially offset with API reporting gasoline inventories fell 2.2 million barrels with expectations being for a 1.5 million decrease. All in all it was a somewhat bearish report and WTI is down 63¢ this morning.

Blog Weather 8-24-16
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Information Systems LLC

Natural Gas

The bulls were stampeding yesterday pushing natural gas prices 8.2¢ higher closing at $2.761. Those bulls have been feeling pretty powerful lately driven by the warmer weather forecast. Prices have rallied more than 25¢ over the past couple of weeks on that forecast. It’s Groundhog Day today with the forecast a repeat of yesterday continuing to show above normal temperatures for the eastern ¾ of the country and natty is up 4.7¢.

Tropical Storm Gaston is out in the middle of the Atlantic and forecasted to move north, northwest posing no threat to the U.S. There is tropical disturbance east of Puerto Rico with the NOAA forecasting a 60% chance of cyclone formation, i.e., tropical storm. We need to keep one eye on this one.

Elsewhere

We have wind and solar. Get ready for tidal power. A few nations are testing the viability of generating power from changes in the ocean’s tide. The top four in order of tidal energy capacity are South Korea (511 MW), France (246 MW), the UK (139 MW) and Canada, actually Nova Scotia, (40 MW). Tides in the Bay of Fundy off Nova Scotia push more than 160 million tons of water a day, more than four times the combined flow of every freshwater river in the world. Earlier this summer two, five story, two-megawatt turbines were installed in the Bay and are capable of generating enough power for 1,000 homes. Research from Acadia University suggest there is potentially more than 7,000 MW’s of capacity that could be generated there, 2,500 of which can be commercially harnessed without significantly impacting the marine environment. Nova Scotia recently announced its intention to have 47% of its energy needs provided by non-fossil fuel sources by 2020. In 2015, 27% of the province’s electricity consumption was supplied by renewable energy.

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