Equities and the Economy:

• U.S. equities hit record highs.
• Weaker economic data suggest slower interest rate hikes.

The last Morning Energy Blog was last Monday discussing the previous Friday’s market action and I can tell you it was a good week. The Dow and S&P 500 closed at record highs on Friday and the Nasdaq finished just 0.1% shy of a record close. Getting the numbers out of the way, on Friday the Dow gained 85 points closing at 21,638, it’s 3rd consecutive record close and the 25th record close for the year. For the week the Dow was up 1%. The S&P rose 11 points on Friday finishing at 2,459, its first record close since June 19th. The bellwether index was up 1.4%. While the Nasdaq didn’t set a record close, it came very close climbing 38 points on Friday to 6,312 posting its 6th straight higher close. The tech heavy index had a stellar week rising 1.4%.

So what’s the driver here? Softer than expected economic data. Yes, you read that right. If you’ve been a reader of my Blog you should know by now the relationship between stocks, economic data and QE. It works this way. The softer economic data came last week in the form of flat inflation for June and a report that retail sales were weaker than forecast. Investors interpreted the data that the Fed will be slower to raise interest rates than previously thought. Lower interest rates, a form of QE, are good for stocks. Current surveys are showing the likelihood of an interest rate hike in December, which would be the only and last one for the year, slipping to 40% and a only a single rate hike each in 2018 and 2019, which by the way, is well below what the Fed is transmitting.

Caution might be in order here. Wall Street’s Fear Gauge, the VIX, closed at its 3rd lowest level since 1993 on Friday. This may be telling us everyone is becoming just a little too lackadaisical about the risks inherent in the stock market.

This morning is beginning quietly with the Dow up 13 points.

Oil

• Prices rally 5% on the week.
• Nigerian force majeure and U.S. inventory draw.

Oil prices closed higher on Friday with WTI rising 46¢ closing at $46.54 and Brent adding 49¢ settling at $48.91 capping off a week that saw prices rise for 5 consecutive sessions and gaining over 5% for the week. A few drivers were at work here. First, on Wednesday the EIA reported a drawdown of crude and gasoline inventories much greater than analysts were forecasting. Second on Thursday the Paris based IEA reported that it boosted its 2017 demand growth forecast, and third, Shell declared a fierce majeure on exports of its Bonny Light crude because of a pipeline shutdown. Most of Nigeria’s oil production is in the Niger River Delta area in the southern portion of the country where various militant groups operate often targeting the oil and gas infrastructure there with sabotage.

On Friday Baker Hughes released its U.S. rig count report noting no change in the oil and gas rig count from the previous week. The oil rig count increased by 2 and the natural gas rig count dropped by 2. The oil rig count is at 765 which is the highest level since April 2015. That being said, the momentum of rig growth is definitely slowing. The average number of rigs added over the past 4 weeks is just 5 which the lowest since November 2016.

WTI is up 60¢ this morning on some very bullish news out of China. The government reported that throughputs at its oil refineries in Juan was 11.21 million bpd, the second highest on record, and just short of December 2016’s record high of 11.26 million bpd. Additionally, China reported its Q2 2017 GDP at 6.9% y-o-y which was greater than expectations of 6.8%.

Courtesy of MDA Information Systems LLC

Natural Gas

Prices up 4.1% on the week.
$3.00 is the number!

On Friday natural gas prices closed up 1.9¢ at $2.980, but looking at the forest rather than the trees, $3.00 is the anchor number. That’s where natty’s been broadly trading for a month and a half now. Here’s the yin-yang. Natural gas demand has been higher of late due not only to the warmer weather but also strong LNG demand and exports to Mexico. Offsetting that though is that U.S dry production is currently up around 72.0 Bcf/d whereas it was around 71.0 Bcf/d for the first 5 months of the year. The increased supply is primarily due to the slowly increasing pipeline capacity out of the Marcellus and Utica regions in the northeast which is allowing more constrained production to flow.

This morning the weather forecast, which is always an exciting one on Monday, is little changed from Friday continuing to show no major heat waves in the all-important northeast over the next couple of weeks. Natty is up 1.6¢.

Elsewhere

Elon Musk is at it again. Tesla announced last week it won the bid to construct the largest lithium-ion battery storage project in the world. It will be located in Southern Australia. The company is teaming up with French-based Neoen to build the 100-megawatt battery by the end of 2017. When complete it will be more than three times the size of the world’s current largest storage facility. The idea of the project came about because a few months ago Southern Australia had a power crisis because its wind-heavy power grid failed to deliver. The immense battery will store electricity generated by wind farms with the objective of stabilizing the state’s electricity grid.