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Morning Energy Blog – July 26 ,2016

Equities and the Economy

I should travel more often. I’m out of the office and stocks rally. Yesterday was my second full day in the office in two weeks and equities fall. Yesterday the Dow fell 78 points, 0.4%, closing at 18,493, the S&P 500 lost 7 points, 0.3%, ending at 2,168 and the Nasdaq ended off 3 points at 5,098. Energy stocks were the big losers with oil prices falling. Let’s keep this in perspective however. The losses are minimal and we’re coming off record highs. As the Black Knight said in Monty Python’s Holy Grail, “It’s just a flesh wound.” Let’s call it profit taking as we head into the big events of the week which are the FOMC meeting today and tomorrow and the Bank of Japan’s Monetary Policy Committee meeting on Friday. Those are the big ones but technically 15 central banks meet this week. Speaking of the Fed, don’t expect a change in interest rates. I also point out that this probably means there will not be any changes in interest rates until December, at the earliest. After this week’s meeting the next two meetings are in September and November and that’s getting close to the election. Additionally, the September and November meetings do not have press conferences scheduled and typically the Fed makes changes in monetary policy, such as an interest rate change, when a press conference is scheduled to explain their actions. Now this doesn’t mean Dr. Yellen couldn’t have an unscheduled post meeting press conference but it’s very unlikely. Bottom line, no interest rate hike between now and December is good for stocks!

There was only one economic report of significance released yesterday and it was parochial in nature. The Dallas Fed noted its General Activity Index for July for the region came in at -1. Although it’s a negative number it’s way better than June’s -18 and much better than expectations. It looks like economic activity has stabilized in the central southwest after taking a pounding from the precipitous fall in oil prices and accompanying company layoffs.

This morning the Dow is down 1512 while the Nasdaq is up 16. Quiet ahead of the FOMC meeting.

Oil

Oil prices have and continue to get whacked. Yesterday WTI lost another $1.06, 2.4%, closing at $43.13 and Brent fell 97¢, 2.1%, settling at $44.72. Oil prices are now at 2 ½ month lows having dropped more than $9.00, 17.5%, from last month’s high near $52. As I mentioned yesterday, gasoline inventories were supporting crude prices and now those inventories are building, despite that we’re in the heart of the driving season, and traders are noting that it won’t be long (~ 5 weeks) until that season ends. Additionally, supply disruptions in Canada, Nigeria and Libya have abated somewhat easing supply side fears. And then you have to take into account the dollar which although slipping yesterday is close to 4 month highs vs. a basket of major currencies. All in all, a lot of weight for the bull to carry.

This morning WTI is down 41¢ rebounding from being down almost 70¢ earlier.

Blog Weather 7-26-16
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Information Systems LLC

Natural Gas

Despite a major heat wave across the Midwest and northeast natural gas prices settled 4.3¢ lower yesterday at $2.747. As I mentioned yesterday, we’ve been straddling the $2.75ish level all month. Supporting prices this month has been major maintenance on the Rockies Express Pipeline (goes from Rockies region to upper Midwest ending in Ohio) which took a Bcf/d day of gas off line the past couple of weeks. That’s a lot amigos! The maintenance will be completed this week which will make balances “looser.” Tomorrow the August Nymex contract expires and then we’re trading September, a shoulder month, and traders are possibly beginning to trade the shoulder months. The weather forecast is little changed from yesterday with above normal temperatures expected over the next two weeks for the eastern portion of the country nut after that the heat moves out of those regions toward the southeast. Traders don’t like it this morning and natty is down 4.6¢.

Elsewhere

All of you are connected to the U.S. electricity grid but I bet most of you don’t know about the U.S. electricity grid. Oh, you may know about ERCOT or PJM but not the U.S. grid so I thought I’d give you a primer on it. In the U.S., the power system consists of more than 7,300 power plants, nearly 160,000 miles of high-voltage power lines and millions of miles of low-voltage power lines and distribution transformers which connect 145 million customers. Local electricity grids, like ERCOT and PJM, are interconnected to form larger networks. At the highest level, the U.S. power system in the lower 48 states is made up of three main interconnections which largely operate independently from one another.

• The Eastern Interconnection encompasses the area east of the Rocky Mountains and a portion of northern Texas.
• The Western Interconnection encompasses the area from the Rockies west .
• The Electric Reliability Council of Texas covers most, but not all, of Texas.

This large network structure helps maintain reliability by providing multiple routes for power to flow to many load centers and prevent transmission line or power plant failures from causing interruptions of service, i.e. rolling blackouts. The last major electrical outage was in August 2003 in the northeast and Canada affecting 55 million people.

Blog image 7-26-16

 

 

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