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Morning Energy Blog – January 13, 2017

Equities and the Economy:

• Stocks continue to meander.
• Fundamentals look solid.

The lumberjack continues working away. Chop. Chop. Chop. That explains the U.S., and even the European, equity markets over the past month. Yesterday it was more of the same with the Dow closing down 63 points at 19,891, the S&P 500 dropping 5 to 2,270 and the Nasdaq falling 16 points to 5,548.
Let’s keep in mind that the S&P has risen 6.4% just since the November 8th election. If you extrapolate that to 12 months you get over 38%, and that is unrealistic. So, we need some time to pass before going higher. We’re bivouacking. The fundamentals look pretty good. People are confident (example, Wednesday’s Blog noting small business index optimism index highest since 2004!), consumers are willing to spend and they’re making more money and able to spend. All good news amigo. Remember, consumer spending is 70% of GDP. But as I said, we need to “buy some time.” I also like the price action. While we haven’t broken Dow 20,000 we haven’t retreated from it. We’ve been hanging out right under that level.

Turning to the fundamental data, the Labor Department reported that import prices for 2016 rose 1.8% , which is the largest gain since March 2012, but still below the Fed’s 2% target. That being said, it’s further evidence inflation, and not deflation, is creeping back into the economy.

The behemoth China’s economic activity is slowing. For 2016 her exports were down 7.7% and imports were down 5.5% y-o-y.

The lumberjack remains at work. Dow futures are up 63. Chatter. U.S. stock markets are closed Monday for Martin Luther King Day.

Oil

• Oil prices post moderate gains.
• Saudi Arabia announces additional production cuts.

WTI and Brent prices closed higher yesterday with the former rising 78¢ to $53.01 and the latter climbing 91¢ settling at $56.01. Prices got support from the Saudi oil minister’s comments that the Kingdom curtailed sales in January and will cut them even more in February. Oil buyers in China have been told their allotment of Saudi crude for February will be cut. However, Japan’s and other Asian nation’s allotments have not changed.

Reuters had an interesting comment regarding OPEC countries cheating on their quotas saying their anonymous OPEC source stated “Compliance won’t be 100%. It never is.” Adding that an “Overall compliance rate of 50% to 60% would be good enough.” Clearly the weight of OPEC’s production cut is on Saudi Arabia’s shoulders.

Much has been made lately of the fact that Russia has cut 100,000 bpd of production this January. However, nearly all of that reduction is due to the truly frigid temperatures in the oil producing areas. Let’s see what happens in a couple of months when temperatures rise.

This morning its chatter. WTI is down 31¢.

A word to oil and gas producers. You better be able to make money at around $53/bbl. for the next couple of years. Unless there’s some anomalous geopolitical event we’re going to be around that price for quite a while.

Weather 1-13-2017
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Information Systems LLC

Natural Gas

• EIA storage report bullish.
• February natural gas jumps 16.2¢.

The EIA released its weekly storage report yesterday stating 151 Bcf was withdrawn from storage last week. This was markedly higher than estimates of 135 Bcf. The market reacted as one would expect immediately shooting higher. February natural gas closed up 16.2¢ at $3.386. The 12 month strip closed up 13.5¢ and calendar 2018 rose 5.8¢. The 24 month strip is $3.258 and calendar 2018 is $3.155. You can count on the rig count rising. Good money can be made at $3.00. This assumes the independent producer, who is always the swing producer, can attract capital. The independent producer lives and dies on debt and with investors still remembering the precipitous drop in oil and gas prices the last few years they may be slow to step back into the oil and gas investment waters.

Speaking of low prices, per our EIA, natural gas spot prices in 2016 averaged $2.49/MMBtu at Henry Hub, the lowest annual average since 1999. That’s what happens when you get an El Nino driven record warm winter.

No material change in the overnight weather forecast. This morning it’s very quiet with natty down 1.3¢.

Elsewhere

We all know President-elect Trump loves to Tweet. Whenever he tweets about Mexico the peso jumps around on international currency markets. Since the election the peso’s value has fallen drastically and Mexico is spending considerable reserves to defend the currency, but peso traders have come up with a cheaper solution: Just buy Twitter for $12 billion and then shut it down.

Have a good weekend.

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