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Morning Energy Blog – July 28, 2016

Equities and the Economy:

It was, as Yogi Berra said, “déjà vu all over again” on Wall Street yesterday with the Dow and S&P 500 pretty much closing flat to Tuesday’s closing numbers and the Nasdaq rising. The Dow lost 2 points to 18,472 and the S&P fell 3 points to 2,167. Total chatter. The Nasdaq had a second consecutive nice day climbing 30 points, 0.58%, ending at 5,140. The Nasdaq was buoyed by biotechnology stocks which closed up 2.4% yesterday. That being said, that index, the IBB (Nasdaq Biotechnology Index), has gotten destroyed over the last 12 months being down 25%. The event yesterday that all investors were looking toward was the post-meeting communique from the FOMC (there was no post meeting press conference). To no one’s surprise the Fed left interest rates unchanged but what investors were looking for in the communique was a clue to when interest rates might be raised. From my research and reading, it’s going to be a long time before that happens. The dovish tone of the communique implied there will not be an interest rate hike in September. The next meeting after that is in November which is one week before the election so you can count that out. The very soonest we could see interest rates rise would be December, and that’s a low probability. The meeting after that is January 31st – February 1 which will be the first meeting when new regional Federal Reserve Presidents will be rotated into voting positions and this year’s voters rotated out so the odds of a hike then are very low. Therefore, it may be mid-March of 2017 before any tightening of monetary policy is undertaken.

There was some important fundamental reports yesterday. Durable Goods came in very disappointing for June falling 4% from May. This was primarily driven by weak airplane orders for civilian aircraft which fell a stunning 60% in June. However, the report was not all bad. Core capital goods, an indicator of business investment, rose 0.2% after two months of declines.

June pending sales of existing homes was somewhat disappointing coming in at +0.2% in June from May. Since June of last year pending sales of existing homes have risen a scant 1.0% while final sales of existing home have increased 3%. A big part of the issue here is that there’s been a lack of inventory.

For a third consecutive day equity price action is muted with the Dow down 53 points following European stocks which are marginally under pressure. Pretty much chatter. Don’t forget that tomorrow is the last business day in July and for all intents and purposes all of Europe goes on “holiday”.

Oil

Oil prices continue to trade lower hitting new 3 month lows yesterday. WTI lost an even buck closing at $41.92 and Brent fell even more settling down $1.40 at $43.47. Growing gasoline inventories have been bringing in the bears and yesterday they got confirmation when the EIA released its weekly crude and products report showing a surprise build of 1.7 million barrels in crude stocks. Adding to bearish sentiment was that gasoline inventories rose 500,000 barrels last week. U.S. crude oil inventories are currently at 521.1 million barrels which is the highest ever for this time of year. Not a bullish picture amigos. The price curve is reflecting the oil glut. Whereas the average of WTI and Brent price one year front month spread a month ago was $3.90, it is $5.36 this morning. Clearly oil is bidding for storage.

Goldman Sachs sees no threat of oil prices going higher. They released a report stating WTI prices will be $45 – $50/bbl until mid-2017 barring some unforeseen geopolitical event.

Blog Weather 7-28-16
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Information Systems LLC

Natural Gas

The August natural gas Nymex contract expired on a weak note yesterday continuing the trend of weaker prices which began at the very beginning of July. Yesterday August natty fell an even 4 cents expiring at $2.672 setting the price of unhedged natural gas and electricity supply agreements. Prices are down about 30¢ from their high 3 weeks ago when we were close to $3.00. Even though storage injections have been very low and demand very high due to the hot weather of late, the market appears to be very comfortable with the supply/demand balance and the fact that storage levels are at record levels for this time of year. Speaking of storage, today is Thursday which means we’ll see the EIA’s weekly storage report. The market is looking for an injection of 26 Bcf which although is anemic compared to the 5 year history (52 Bcf), but as I mentioned previously, inventories are at very comfortable levels.

Although we’re still in the heart of the summer, July, futures traders will now be trading a “shoulder month” with September as of today being the prompt month which is up 6.4¢ as I write.

Elsewhere

History was set this past Tuesday. On that day the Solar Impulse 2 ended its epic journey around the world. It was the first time a plane solely powered by solar energy circled the globe. The journey took a very long time, 505 days to fly 26,000 miles, at an average speed of 45 mph. The aircraft was outfitted with more than 17,000 solar cells, has a wingspan of 235 feet and weighs only 2.4 tons. The journey earned numerous records including the trans-Pacific leg which took 5 days and nights setting a mark for the longest solo flight in any airplane. The pilot was Bertrand Piccard who has a habit of setting records. He was also the first person to make the first non-stop circumnavigation around the globe in a balloon in 1999. It appears setting records is a family tradition. His father made the first trip to the bottom of the Mariana Trench which is located in the western Pacific Ocean east of the Mariana Islands and is the deepest stop in all the world’s oceans.

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