Good morning. I hope everyone enjoyed the holiday and got a chance to spend time with your loved ones. Let’s see what’s transpired since last Monday which was the last closing data reported. On that day the Dow and S&P 500 closed at record highs of 17,818 and 2,069, respectively. The Nasdaq closed at 4,755. Last Friday, on verrrry thin trading, the Dow closed at a new high of 17,830 but the S&P actually fell on the day closing basically flat to Monday at 2,068 and the Nasdaq climbed to 4,792. For the month of November the Dow, S&P and Nasdaq were all up with the former two posting a 2.5% gain and the latter a 3.5% increase. So November was definitely a good month.

Unfortunately, December is not picking up where November left off for although the Asian markets closed mixed the European bourses are getting hit, especially London’s FTSE down 1.05%, and Dow futures down 62 points. Equities are “frothy” and there’s a lot of concern among investors about global growth making stock markets around the worked very vulnerable to negative news flow on macroeconomic indicators. We are seeing some of that right now. Moody’s came out and downgraded Japan’s credit rating from Aa3 to Aa2. Now this is the smallest increment that can be made and Moody’s attached the term “stable” to the outlook, but a downgrade is a downgrade and at the margin, which is where prices of everything are set, it’s negative. It’s still early so let’s see how the day ends for closing are more important than openings.

Last Thursday was a very, very bad day for the oil bulls. That was the day OPEC met. Rumors abounded that the cartel might cut production by 1 million bpd. Now that amount is estimated to be about 50% of what analysts believe is the oversupply of global production, but it would be a cut. Well the meeting ended and much to Iran’s and Venezuela’s chagrin OPEC did not cut production by one single drop. The decision sent WTI and Brent prices into a free fall. With the Nymex closed on Thursday the effect was felt on Friday with WTI losing $7.54, a whopping 10.45%, settling at $66.15. You have to go back 5 years to get a lower front month settlement, September 25, 2009, to get a lower settle. It just capped a horrible month for WTI with it losing 18% over the period, the largest one month decline since December 2008.

On Friday Brent only fell $2.43, 3.53%, finishing at $70.15/bb. You’re thinking “Not too bad considering WTI’s fall” but what you missed was that on Thursday the Brent market in the UK was open and it fell 6% on that day! Friday’s Brent settle was the lowest since May 25, 2010.

Oil prices have lost a staggering 40% of their value since peaking last June. Saudi Arabia is clearly saying “We are not hurting yet because we are the lowest cost producer.” They have the U.S. shale producer in their cross hairs and don’t want to give up market share so they’re going to take prices to levels that will impact capital drilling budgets. But this will take time for capital budgets are made months, and sometimes years, ahead of the time so it will take time to ripple to the drill bit. It’s likely we’ll see oil prices go lower but remember, the shale oil well production decline curve is quite steep, much more steep than a conventional well, and it won’t take long for a cut in drilling to impact production. This morning we’re seeing a bounce, a correction, with January WTI up $1.03. Not too bad for the bulls but it’s a small consolation to the damage wreaked on Thursday and Friday. By the way, and logically, gasoline prices are following crude prices lower with the December Nymex contract falling 13¢/gallon on Friday which is the lowest settlement price since September 22, 2010 which was when we were in the Great Recession.

Courtesy of MDA Information Systems LLC

It had absolutely nothing to do with OPEC but natural gas prices were taken out behind the woodshed on Friday and not whipped, but shot, falling 27¢, 6.1%, closing at $4.088/MMBtu. It’s all about the colors on the map and those colors are yellow and orange and not blue in the major gas consuming regions of the country meaning above normal temperatures are forecast (see map). The correlation is high in the winter folks: blue, prices rise. Orange, they fall. Today’s forecast is reinforcing Friday’s and natty is following suit with the January contract down 11.6¢ as I write. That being said, for the month of November natural gas prices rose 5.6% with the rise attributable to the record cold period we experienced earlier this month. But in the trading business that is ancient history. By the way, we need to keep a very close eye on oil drilling to get an idea of where natural gas prices are headed. The natural gas production from shale oil wells has been responsible for pushing prices down and I’ve seen the decline curves for natty production from these wells. It’s in the order of 50% the first year and then another 50% between years 2 and 3. Folks this is very material. It won’t take long for a decrease in shale well drilling to impact natural gas production especially with North American demand increasing.

Folks, you just got QE4. And this time it wasn’t the Fed, or the Bank of Japan, or the ECB, or the Peoples Bank of China. It was OPEC. As if on cue, just as the Fed stops buying assets, oil prices plummet. This is to the delight of those on the Left who for years have been protesting that all the QE we’ve had has only helped the 1%, “the rich,” those owing equities, and not helping “Main Street.” It’s hard to imagine a more far reaching and effective stimulus measure than to lower the cost of oil and gasoline at the pump. Consumers will now have more in their pocket to spend and companies will be able to lower their cost of production. So who are the losers other than the obvious being OPEC and oil and gas producers? That would be Canada, Russia and Australia. Have a good day.