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Morning Energy Blog – December 5, 2017

Equities and the Economy:

• Dow closes at record high.
• Portfolio rebalancing continues.

In a very volatile day U.S. equities closed mixed. Yesterday morning the three major indexes were up big driven higher by the Senate’s passage of their version of the tax reform bill over the weekend with the Dow up over 200 points, but they couldn’t hold on to their gains. The Dow did manage to close at a record high of 24,290, up 58 points, but well off its intraday high. The S&P 500 hit a record high intraday but closed basically flat to Friday down 3 points at 2,639. The Nasdaq got whacked falling 1.05%, 72 points, to 6,775. It’s been a very good year. The S&P is up a huge 18% this year with the Nasdaq even more, and I’m seeing 1) profit taking and 2) a rebalancing of managed money portfolios out of high tech stocks into more conservative and less volatile Dow stocks. What’s going on here is, as I said, it’s been a very, very good year for money managers and they’re looking at some big bonuses for 2017 and they are going to lock in those bonuses and reduce their stress level for the remainder of December. That’s what I did when I was trading energy. Another reason to take profits: the S&P 500 is now trading at 18.2 times expected earnings, the highest since 2012. That being said, there’s no reason to sell.

The major fundamental data point yesterday was U.S. factory orders which fell 0.1% in October but that was driven lower by fewer sales of passenger planes which can radically change the number. Just one plane sale moved from month to the next can move this data point.

The optimism continues over tax reform this morning Dow up 31. By the way, there’s a lot of commentary out there regarding the impacts of the tax reform, but for equities the cornerstone is the decrease in the corporate tax rate.

Oil

• Prices fall first time in 3 sessions.
• OPEC production drop to 6 month low.

Oil prices fell for the first time in 3 sessions yesterday weighed down by both a rising U.S. rig count and rising production. Maybe “weighed down” is not the correct term. Profit taking is more appropriate being prices remain near 2 year highs. Yesterday WTI closed down 89¢ at $57.47 and Brent fell $1.28 to $62.45. Additional pressure on oil prices came from a stronger U.S. dollar. You all should know by now that a stronger dollar is bearish of commodities priced in dollars because it makes those commodities more expense to foreign investors.

Traders shrugged off bullish data from OPEC showing, per Reuters, OPEC-member crude output fell by 300,000 bpd to 32.25 bpd in November. That’s the cartel’s lowest level of production since May. Reuters pegged member compliance in November at 112%, up from October’s 92%. How can you get over 100%. Because countries like Saudi Arabia produce less than their quota. I’ve said it before and you’re going to hear it many times in 2018, the Saudi’s are going to do everything necessary to keep oil prices up at least until their IPO schedule for Q4 2018. 2018 should be a good year for the U.S. producer.

A couple other bits of news. 1) yesterday Saudi Arabia stated they will lower the official selling price of oil to the U.S. by 20¢/bbl next month, 2) Per CFTC data, hedge fund and money managers are currently massively long oil futures. If we lose momentum to the topside at least some liquidation will occur.

This morning is beginning very quietly with WTI down 3¢.

Blog Weather 12-5-2017
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Information Systems LLC

Natural Gas

• Cold weather forecast not helping prices.
• Cash gas in northeast strong.

After rallying to near a 3 week high last week above $3.200 prices have fallen nearly 30¢, 9%. Yesterday January gas closed down 7.8¢, 2.5%, at $2.985. And this despite a very, very cold weather forecast. Temperatures in the Midwest and Northeast will be 8-15 degrees below normal for the 6-15 day time frame which will most definitely result in big draws on natty. Traders apparently are putting more weight on increasing U.S. production than the greater demand. Here’s some amazing data. Per the EIA, in 2012 the average production from a Marcellus and Utica well was 7.8 Bcf/d. For 2017, the average well production is 23.8 Bcf/d. That’s an astounding increase of 16.0 Bcf/d. That’s huge! Additionally, in 2011 it took 30 days to complete a Marcellus well. In 2015 (the latest data available) it took only 7! So you can see, it doesn’t take an increasing rig count to increase production. Other data comes from the Haynesville, which is primality in Louisiana. Natural gas production there has jumped 57% since the start of the year going from 2.6 Bcf/d to 4.1 Bcf/d. This is an important data point to me because the Haynesville is mostly a “dry” gas play meaning the producer doesn’t get any price uplift from condensates (propane, ethane, butane) that is associated with “wet” gas such as in the Marcellus in southeast Pennsylvania and West Virginia. This means the Haynesville producer can make money at current prices.

This morning the weather forecast has marginally backed off the cold for the 11-15 day time frame and the bears are out in force with natty down 9.2¢

Elsewhere

This is a follow up to an Elsewhere last week. I mentioned that American Airlines had a scheduling snafu allowing too many pilots to schedule vacation time over the coming holidays leaving approximately 15,000 flights without enough pilots. It was tenuous for a while, but you travelers between December 17 and the 31st can now rest easy. American has resolved the matter. The airline had been offering 150% of pay for pilots to fly during the period, which was the most allowed by the pilots contract. Over the weekend American and the pilots’ union reached an agreement where pilots will now be paid 200% of regular wages for flights during that time period. As one veteran American Airline pilot said, “Double. I’d probably go do that.”

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