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Morning Energy Blog – July 27, 2016

Equities and the Economy:

The Dow and S&P 500 were lackluster yesterday with the former off 19 points to 18,474 and the latter up a single point to 2,169 but the Nasdaq got a nice pop, thanks to Apple, rising 12 points, 0.24%, to 5,110 and at a new 2016 high. The “fruit” company posted better than expected Q2 earnings which pulled the tech heavy index higher. Apple is also in the Dow but that index was pulled down by McDonalds whose stock price tumbled 4.5% yesterday marking its worst percentage drop in seven years and cutting about 40 points off the Dow.

It was a busy day for the fundamentalists with a plethora of economic reports out yesterday. The most important ones were: 1) the Commerce Department reported new homes sales rose 3.5% in June to a seasonally adjusted rate of 592,000. That’s the strongest level since 2008! This is a sign that the job market is very healthy because folks wouldn’t be taking out 30 year mortgages if they were worried about losing their job. Speaking of mortgages, rates were near record lows last month which improved affordability. Sales surged in the West and Midwest by more than 10% while declining in the Northeast and South. Additionally, June’s median new home price rose 6.1% from a year ago to $306.700. 2) the Conference Board reported that consumer confidence came in better than economists had expected holding steady in July at 97.3 compared to June’s 97.4. Remember, this was the time of the Brexit vote so “steady” is very good. Interpretation: consumers remain cautiously optimistic about the economy and their prospects going forward.

The FOMC meets for a second day today and then will release it post meeting communique. There is a zero chance of the Fed raising rates at this meeting. The focus will be on the communique with investors parsing it for indications of when there might be an interest rate increase.

The market is starting out nicely today with the Dow up 56 points on the heels a material strength in Europe with the indexes there trading up between a healthy 0.64% in London and France’s CAC 40 which is screaming higher up 1.6%.

Oil

Oil prices ended little changed yesterday with WTI down 21¢ closing at $42.92 while Brent gained 15¢ settling at $44.87. That being said, oil prices are trading at 3 month lows weighed down by high gasoline inventories which will weigh on demand for crude oil from refiners. Not good news for the bulls is that gasoline inventories are high even though we’re in the peak of the summer driving season. Speaking of inventories, the API released its weekly crude oil and inventories data and the data came in pretty much as expected showing an aggregate decline in stocks of 900,000 barrels. The market is reacting properly to the ho-hum number with WTI up a meaningless 18¢ this morning.

In the recent past traders looked at the oil rig count for a clue as to future U.S. production levels. Well that piece of data is becoming less and less important. Now the rig count is almost, but not entirely, irrelevant to calculating the nation’s future oil production. While the oil rig count is down approximately 70% from its high, oil production is down only about 8% from its peak in April 2015. So how can E&P companies cut capital expenditures, drill less yet pretty much maintain production levels? Productivity my friend, productivity. With oil prices so low relative to the recent past, E&P companies have “hunkered down” improving rig productivity through technology and efficiency. Per the EIA, new-well oil production per rig through July 2016 averaged 796 bpd in the Bakken region, 983 bpd in the Eagle Ford and 470 bpd in the Permian. These levels represent increases of 155 bpd, 226 bpd and 111 bpd, respectively, over 2015 averages. Regarding rig productivity, Halliburton CEO put it succinctly. “In the next North American rig cycle, 900 is the new 2,000.”

Blog Weather 7-27-16
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Information Systems LLC

Natural Gas

On its penultimate, the August natural gas Nymex contract fell 3.5¢ to $2.712. We’ve now spent 3 weeks pivoting around the $2.70 level. Yesterday’s price drop was the result of the weather forecast showing temperatures moderating from much above normal temperatures to slightly above normal temps lowering natural gas demand. That being said, I fully expect natural gas consumption in the electric generation sector to continue to set records for the remainder of the summer. It needs to. We just don’t have the capacity in storage to inject the gas. Remember that due to the very warm winter we came out of last winter with a record amount of natural gas in storage. The amount of storage capacity the U.S. has is finite. Unlike oil, we can’t put natural gas in a bucket and send it overseas.

Today’s weather forecast is a repeat of yesterday and the market is reacting as such with natty up 3.4¢. Don’t forget, the August Nymex contract expires today.

Elsewhere

Those folks buying real time power in New York City got a surprise yesterday. Due to the sweltering heat in the area the spot price of electricity at 3:30 PM hit $1,042/MWhr. That’s $1.042 per kWh!. Now that price only lasted for a couple of 15 minute intervals which only marginally affected the power price as averaged over the entire day, but it did get traders talking!

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