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Morning Energy Blog – December 29, 2016

Equities and the Economy:

• U.S. stocks little changed in a week.
• Dow still looking to penetrate 20,000.

It’s been a week since the last Morning Energy Blog and in that time U.S. equities have gone sideways. Last Wednesday the Dow, S&P 500 and Nasdaq closed at 19,942, 2,265 and the Nasdaq 5,471, respectively. Yesterday the three ended at, in the same order, 19,834, 2,250 and 5,439, all down marginally from last week. The Dow is trying hard to trade 20,000 before the end of the year. Yesterday morning in early trade it got within 20 points of the psychologically, although not fundamentally or technically, important number but the market lost momentum and all three indexes closed lower on the day. The Dow fell 111 points, the S&P 19 and the Nasdaq 49. Of note, yesterday’s volume was the lowest trading volume of any full session this year! The market needs some consolidation. Equities have surged since Trump won the election and some bivouacking is needed.

There was one fundamental report yesterday of significance, Pending Home Sales. As I’ve mentioned many times, the housing market has been the backbone of the economic recovery aided by low mortgage rates. Yesterday, though, pending home sales for November were reported coming in at a very disappointing negative 2.5% relative to October and way below economists’ forecasts. The combination of lack of inventory, continually rising prices and now rising mortgage interest rates are making “affordability” less attainable.

This Dow has two days to hit 20,000 and it’s not giving up on that goal being up 23 points this morning. Got some work to do here.

Oil

• WTI prices rise for 4 consecutive sessions yesterday closing at $54.06.
• Prices at nearly 18 month high.

Yesterday WTI closed up only 16¢ at $54.06 but it marked the 4th consecutive rise. Prices have risen $1.57/bbl over the last week on expectations that OPEC and its non-OPEC partners will make good on promises to cut production. Whether they do or do not I’m not sure, although they’ve always cheated, but their rhetoric/agreement has put a lot more money in their treasuries of late. The deal they agreed upon is to go into effect next month and if enacted would cut global production by 2%.

U.S. production is responding to the higher prices. Per the EIA, for the week ended December 18th U.S. production averaged 8.78 million bpd which is up from late July’s 8.43 million bpd.

Here’s a very interesting fact about the WTI price curve right now. The price of WTI is completely flat between now and through 2021. The 12 month strip (February 2017-January 2018) is $56.41 which is only 45¢ less than the calendar 2021 (January –December) strip.

This morning it’s very, very quiet with WTI down a meaningless 7¢

weather-12-29-2016
weather-bar-image-for-blog
Courtesy of MDA Information Systems LLC

Natural Gas

• The January natural gas Nymex contract expires up 16.9¢ at $3.930.
• Prices at two year highs.

A short squeeze occurred yesterday on the January 2017 Nymex natural gas contract’s last day in existence posting a 16.9¢, 4.5%, gain settling at $3.930 and at a two year high. The high trade of the day was just 0.6¢ shy of $4.00. Prompt gas prices have risen a whopping $1.45, 57%, from their early November low just above $2.50 as Arctic Bombs have and are forecasted to drop on the U.S. The latest Bomb is forecasted to hit next week dropping into the Montana region and then moving east. Those poor Calgarians are going to see highs of 6 and 11 degrees on Monday and Tuesday, 23 and 21 degrees below normal. Youza!

Today is Thursday which means it’s EIA storage report day. The market is looking for a big withdrawal of 225 Bcf which dwarfs last year’s 50 Bcf and the 5 year average of 80 Bcf.

After yesterday’s big surge prices are retreating a tad with the February contract now the front month and down 8.3¢.

Elsewhere

A couple of weeks ago I wrote that Amazon made its first delivery by drone to a customer in Cambridge England. Well yesterday patent filings from Amazon were circulated revealing how the e-commerce titan could make drone deliveries work at scale. The patent shows that Amazon would have “airborne fulfillment centers.” Folks, that’s another name for a warehouse that’s a zeppelin! The airborne fulfillment centers, or AFC’s, would be stocked with a certain amount of inventory and then positioned near a location Amazon predicts demand for certain items will soon spike. Drones, including temperature controlled models ideally suited for food delivery, could be stocked at the AFC’s and sent down to make precise, safe scheduled or on-demand delivery. And you thought zeppelins were only good college football.

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