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Morning Energy Blog – January 5, 2015

Good morning. Welcome back one and all. I truly hope you had a wonderful holiday and could spend time with your loves ones. The last Morning Energy Report was on Tuesday December 30th reflecting the price action of the day before so let’s see what’s happened in 4 calendar days and 3 trading days. Last Monday the Dow, S&P 500 and Nasdaq ended at 18,058, 2.091 and 4,807, respectively. Last Friday January 2nd, in the same order, they closed at 17,833, 2,058 and 4,727. So it was not a good week. The Dow lost 225 points (1.2%), the S&P fell 33 points (1.6%) and the Nasdaq was off 80 points (1.7%). Now being the “glass is half full” kind of guy I am, let’s take a look at what the major indexes did for all of 2014, which was much better. For the year the Dow ended up 7.5%, its 6th straight annual gain, the S&P 500 finished up 11.4% and the Nasdaq rose a very nice 13.4%. Now remember, these are in addition to the whopping gains of 20% we saw in 2013. That’s strong. Real strong! The big laggard, and it doesn’t take a rocket scientist to figure this one out, was the S&P Energy Index which lost 10% in 2014 and was easily the worst performing sector. That’ll happen when oil loses 50% of its value.

So that’s the summary of last week and although technically today is not the first trading day of the year it really is because last Friday trading desks around the world were very lightly staffed and those desks are now in full swing. The big news at the global level is the upcoming elections on January 25th in Greece where it appears, to the chagrin of Germany, a very left, anti-austerity government may be elected with a real possibility Greece may leave the European Union. This, along with the numerous economic reports out of EU showing deflation may exist there, is taking the euro to a 10 year low vs. the U.S. dollar. The Asian markets closed mixed but the European markets are all getting hammered trading materially lower on the political uncertainty surround Greece. Always remember the saying “Confusion breeds contempt” and when there is confusion capital migrates to safety. Here in the States equity futures are being pulled lower like an anchor thrown overboard with Dow futures down 85. By the way, this Friday the U.S. Labor Department releases its monthly labor report for December which is the BIG monthly report and is already being talked about in the market.

Last Monday WTI and Brent closed at $53.17 and $57.70, respectively. Friday WTI closed at $52.69 and Brent at $56.51 so you can easily see that oil continues to “slip” (pun intended). And it’s just getting worse for the bulls with WTI down $1.80 this morning, fresh 5 ½ year lows, and getting close to putting up a “4” handle. Oil has been in a freefall since this summer with supply outpacing global demand and OPEC refusing to cut production. And it just ain’t OPEC. Russia just reported oil production there hit a post-Soviet record and Iraq is seeing its highest exports since 1980. On the other side of the equal sign (that would be demand) you have Europe bordering on recession. That math will bring out the bears every time. “ Look out below!” That’s going to be yell for the U.S. rig count over the next few months.

Blog weather 1- 5- 15
Courtesy of MDA Information Systems LLC

A lot has happened this past week in natural gas. Last Monday natural gas closed at $3.189, which was the January Nymex contract settle. February then became the prompt month on Tuesday and the following day, Wednesday, the EIA reported in its weekly storage report a very much smaller than expected withdrawal from storage, 26 Bcf, sending natty tumbling with the February contract settling at $2.889, down a whopping 30¢ in just 2 days. On Friday natty came roaring back closing up 11.3¢ on weather forecasts showing some darn cold weather dropping into the U.S. this week and next. This week’s cold is being described by our private forecasting services as “exceptional” so you get the idea how cold it is this week. This morning natty is slightly higher 3.1¢ which is off from the 11.1¢ earlier this morning. Gas is cheap my friends.

Lower oil prices have taken an unexpected victim. An LNG plant. Specifically, the Excelerate Lavaca Bay, Texas LNG plant which has put the plant on “hold.” LNG plant developers here in the U.S. are not only counting on low natural gas prices but on high oil prices. Prices that LNG projects can charge for long-term supply are falling from historic highs as new producers crowd the market, which is already oversupplied due to slowing demand and rising output that as seen spot prices for LNG in Asia fall 50% this year. The operator of an LNG plant doesn’t own the commodity. The only liquefy it charging a tolling fee to do so. Therefore, the economics of the plant are primarily on the spread between the cost of supply, natural gas in gaseous form, and the consumers cost of oil or other LNG. Excelerate’s move does not bode well for 13 others U.S. LNG projects which have also not signed up enough international buyers. Only two plants in the U.S., Cheniere’s Sabine Pass and Sempra’s Cameron LNG projects, have hit that milestone. Have a nice day.

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