Equities and the Economy

Santa is working his tail off to bring us a good holiday. U.S. equities rose nicely yesterday following Monday’s gains with the Dow popping a sweet 165 points, 0.96%, closing at 17,417, the S&P 500 rose 18, 0.88%, to 2,039 and the Nasdaq returned to ever 5,000 adding 32 points, 0.65%, ending at 5,001. Volume was lighter than Monday and will be heavier than today which will be greater than tomorrow with its shortened session. The fundamental data was mixed. The report that caught investors’ attention was the existing home sales report from the National Association of Realtors stating sales plunged 10.5% to an annual rate of 4.76 million units. This is the sharpest decline since July 2010. Additionally, October’s sales were revised slightly lower to 5.32 million units. Housing has been providing a sizeable boost to U.S. economic growth this year as a strengthening labor market and low interest rates have helped young adults get into homes. Now this report must be taken with a grain of salt because beginning October 1st some new rules on mortgages were instituted by the Consumer Financial Bureau, such as a sale cannot close until the buyer has had the closing disclosure statement for at least 3 days. The new changes are expected to add 15 days to a closing. If the lender does not follow the rules they are subject to substantial fines so you can imagine they would be cautious delaying the process.

3rd quarter GDP was revised down from 2.1% to 2.0% which was not unexpected so this had little impact on the market. On the positive side, although it is parochial and not catholic, the Richmond Fed reported its index of manufacturing rose to +6 for December from -3 in November which was the first positive number since July 2015 and well above expectations.

Overnight the Asian markets closed mixed however the European markets are up big time between 1.89% and 2.12%. which is pulling up U.S. equities with the Dow up a very nice 112 points. Mining stocks, which in this sector is dominated by energy companies, have been rallying as oil prices have bounced off of multi-year lows.

Oil

Oil prices ended mixed yesterday with WTI rising 33¢ closing at $36.14 and Brent falling 24¢ settling at $36.11. Take a look at those closes again and see if you notice anything. WTI closed higher than Brent. That hasn’t happened in over 5 years, specifically August 16, 2010. The driver behind the price move is the proposed agreement by Congress to lift the 40 year old U.S. crude oil export ban. WTI should in fact trade marginally higher than Brent for it is of slightly better quality. By the way, the bill to lift the export ban includes renewing tax credits for renewable energy resources for 5 years. Long live wind and solar power!

Yesterday evening the API released its weekly crude inventory report noting that stockpiles declined by 3.6 million barrels, which was unexpected. This is giving WTI a boost this morning with it up 94¢.

Low oil prices continue to have their effect. Royal Dutch Shell PLC yesterday announced they are cutting their capital spending budget by $2 billion next year. Not a big deal, except for the fact they cut their cap ex budget by $12 billion this year!

Courtesy of MDA Information Systems LLC

Natural Gas

After skyrocketing 14.4¢ on Monday natural gas prices retreated marginally yesterday falling 2.3¢ settling at $1.888. They are up 26¢, or 15%, from their 14 year low a week earlier. The market was egregiously short and the weather forecasted has shifted cooler, albeit still above normal in the eastern U.S. Instead of being 25-30 degrees above normal, which it will be this week, it will “only” be 5-8 degrees above normal in early January. So how warm is it this week? Well on Christmas Day New York City is forecasted to post a high of 63 degrees, 9 degrees warmer than Los Angeles!

In my 30+ years in the energy markets I never thought I’d be telling you the following for a natural gas flow day in December. Yesterday the northeast actually exported natural gas to southeast! 1.6 Bcf/d of natural gas flowed north to south marking a 2.6 Bcf/d reversal from last December. A combination of record warm temperatures and increased production in the Marcellus Region is the reason.

It’s very quiet this morning with natty down 0.3¢

Elsewhere

Elon Musk once again made history. On Monday after three failed attempts his company Space X (I bet you didn’t know this but the company’s actual name is Space Exploration Technology, Corporation) sent an unmanned rocket into space, deploying its payload, circling the earth and then, most importantly, gently touching down at its lift-off site, Cape Canaveral, Florida. It’s a precedent feat for a U.S. company as it’s seen as the first successful bid to bring a rocket back from orbital flight. The Falcon 9 landed upright on land where earlier efforts has used a floating barge. The feat is being hailed as a game changer for the space industry. It’s a major step toward the introduction of reusable rockets which would dramatically reduce the cost of launches.

It’s also a win in Musk’s race with fellow billionaire Jeff Bezos, chairman of Amazon.com, to develop a reusable rocket. Last month Bezos send a test rocket to the edge of space and landed it safely. But Space X went one better circling the earth before landing safely, considered a much more difficult task.

On a logistical note, the next Morning Energy Blog will be December 29th for my teenage daughters and I will be taking a holiday and spending the next 4 days in New York City, and leaving the heavy winter coats in Houston!