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Morning Energy Blog – January 8, 2015

Good morning. Some good economic news and a rare rise in oil prices gave U.S. equities their first gain of 2015 which has been the worst start to a year since 2008. From the futures before the opening through the opening bell and to the close stocks were strong with the Dow posting a “sigh of relief” rise of 213 points (1.23%), the S&P 500 climbing 23 points (1.16%) to 2,026 and the Nasdaq popping 58 points (1.26%) to 4,650. Besides being oversold and at technical support (2,000 S&P), investors got some good news in ADP’s employment report which showed private employers added 241,000 jobs last month and just as importantly, raised their November employment number materially. Additionally, oil prices rose (better way to put it is “stopped falling”) giving investors another excuse to if not buy, at least cover some shorts. Just a warning folks. This market is way overdue for a correction. Now I’m not saying the bull market is over but investors and traders know this and are going to be “trigger happy” which is going to result in higher volatility and more frequent and deeper pullbacks. Buckle in and order the Maalox now. By the way, tomorrow the Labor Department releases its closely followed employment report for December.

This morning we’re getting a nice follow through to yesterday’s market action with the Dow soaring higher, up 253 points. The forces at work are once again the stabilization of the price of oil and a focus on QE in Europe with both driving European stocks materially higher today. The ECB is seriously worried about inflation but they just don’t know how to go about doing a QE large enough to impact markets. Remember, unlike here in the U.S. or Japan, there is no single pan European asset they can buy. They would have to buy individual sovereign assets and you can imagine the difficulty and political ramifications that entails. Additionally, the ECB needs to wait and see how the elections go in Greece (January 25th) to see what kind of government will be elected and its attitude toward the EU (i.e. the real possibility of secession and the drachma returning, but I’d bet against that).

After falling 10% in 2 days oil finally found a bid with WTI closing up 72¢ at $48.65 although Brent added just a nickel to $51.15. Support emerged after the API reported a surprising drop on crude inventories although gasoline and distillate (primary diesel) inventories rose holding back a bull stampede. The oil futures are egregiously oversold and a bounce, a correction, is overdue. I’m seeing it in the term structures in that although the front month absolute price fell prior to yesterday, the spread between the front month and the February 2016 contract didn’t change, in fact it actually came in a little giving me the “caution” sign. We’re due for a bounce and I wouldn’t be surprised to see WTI climb back into the $51-$53 range. However, I think the bounce will be of the dead cat nature. Lows are tested and retested in markets and the low in oil has not yet been tested even once. But be ready, there’s going to be some screamingly good buys when we get there. This morning WTI is up 17¢.

Blog weather for 1-8-2015
Courtesy of MDA Information Systems LLC

The severe cold the eastern 2/3rds of the country is currently experiencing has not been enough to take natural gas prices higher with the February Nymex contract (the prompt month) closing down 6.7ٙ¢ at $2.871. So why can’t natty rally? Really two reasons. First, supply growth. Natural gas production has been really strong in Q4 and that looks to continue into Q1. 2) the weather. Yes. We’re all freezing our butts off right now but look at the 11-15 day time frame. You can’t get a more bearish forecast than that for January. It’s kinda like that as anomalously cold as it is now, it will be just as anomalously warm in a couple of weeks. This morning natty is hanging in there being up 2.9¢. Have a nice day.

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