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Morning Energy Blog – January 9, 2015

Good morning. Wow! Another spectacular day for U.S. stocks. The Dow jumped a huge 323 points (1.84%) closing at 17,908, the S&P 500 jumped 39 points (1.79%) and the Nasdaq leapt 86 (1.84%) to 4,736. In the last two days the S&P has gained 3% retracing most of the 4.2% loss in the previous 5 sessions and putting the bellwether index into positive territory for 2015. The last two days have also put the Dow and Nasdaq into the green for the year. And guess what? It was the energy sector (along with materials and technology) that led the day rising more than 2% on the day. So what’s driven the market higher the last couple of days? Primarily this was a technical move up off an big down move of 5% that really was not warranted. Stocks were oversold on the excuse of falling oil prices and a concern that global demand was weaker than anyone was thinking. Remember, all markets are not only a reflection of fundamentals but are also very much behavioral in nature, which is why we have “bubbles” and exaggerated “corrections.” The weekly jobless claims was the focus yesterday of investors with claims coming in at 294,000 which was very marginally greater than forecast but below the all-important 300,000 number.

Today the HUGE report of the month was just released which is the Labor Department’s Employment Situation Report for December. It showed the U.S added 252,000 new jobs in December which extends the strongest streak in hiring since the mid-1990’s. The unemployment rate continues to tumble falling to, get this, 5.6%! That’s down from November’s 5.8% and the lowest level since before the Great Recession in June 2008. All good, eh? Well not so much. First, the unemployment rate fell at least partly because more people stopped looking for jobs. Very disconcertingly is that hourly wages fell 5¢, 0.2%, to $24.57 an hour and the gain over the past 12 months slowed to just 1.7%. Wage gains have averaged 2% or slightly less since 2010, just 2/3rds as fast as they normally grow. Economists predict a tightening labor market will spur higher wages but so far that hasn’t happened. That being said, even small businesses, long the laggards in the more than 5 year old recovery, are getting into the act. A new survey by the top trade group for small businesses says its members expect a very good year in 2015 with plans to hire the most employees since the recession ended. Businesses biggest complaint is they can’t find qualified workers. Burger flipping skills don’t get you too far anymore. So how are investors taking the data? Not so good. The Dow is down 78 points. It’s been quite volatile this morning with Dow futures down 156 points early on then up 10 after the release of the employment report and now back down.

For the second day in a row oil prices didn’t fall. Note I didn’t say rise (although technically WTI did gain 14¢ to $48.79) but the gains of yesterday and Wednesday have been nothing but chatter. Oil prices have “bounced” but I feel the strength only to be ephemeral and to be of the dead cat nature. The oil market boat is listing heavily to the short side and needs to roll back more toward neutral. This will take a short covering rally or at a minimum, time. For the record, Brent actually fell yesterday losing 19¢ to $50.96. ‘Nough said. Nothing has changed. Supply is abundant and must be reduced. There’s a very high correlation between rig count and price and I’m seeing rigs being “laid down” but it will take months for supply to be impacted for producers have at least a couple of months of wells to be drilled “in their pipeline.” I think Mr. Greg Wortham’s, head of the Cline Shale Alliance, comments reflect the thinking of the entire oil market “We’re trying to figure out if this is a six month problem, or is it all over.” This morning WTI is down 29¢.

Keep an eye on Washington. The Republican led new Congress is voting on the Keystone Pipeline and the Republicans say they have 60 votes to overcome a veto by President Obama, which is assured. A poll shows 68% of Americans approve the construction of the pipeline.

blog weather 1-9-15
Courtesy of MDA Information Systems LLC

Natural gas prices rose a little yesterday with the February Nymex contract gaining 5.6¢ closing at $2.927. Natty is getting a bid by a strong cash market but just look at that forecast! You folks in the upper Midwest and east are going to be downright “balmy” in a couple of weeks. HDD’s will be plummeting. If that forecast came in August natty would be jumping! You bears out there be careful though. Better look over your coal shoulder. This morning natty is up 3.8¢.

As we all know the PIIG knows as Italy is and has been in serious economic trouble. It has received loans from the Troika (IMF, ECB and European Commission) and those loans and any additional ones depend on Italy reaching some critical economic goals with one of them being reducing their deficit relative to GDP. So how does Italy go about achieving that? Well, cutting spending would be one way. Another would be to increase GDP. So how do you increase GDP? Well you could change the methodology in how you calculate GDP. How about including drugs, prostitution and smuggling in your GDP number?! That is exactly what Italy is doing! Italy will include data from those three “businesses” in its 2014 GDP and figures from prior years will be adjusted upward accordingly. You cannot make this stuff up! Have a great weekend.

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