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Morning Energy Blog – March 21, 2016

Equities and the Economy

Laissez Les Bon Temps Roulez! It’s official. The S&P 500 has joined the Dow in being positive for 2016 with the major indexes closing higher 5 consecutive seeks. A combination of improving conditions and the Fed’s dovish tone last week on monetary policy, i.e. interest rates, prompted investors to take on more risk. On Friday the Dow closed up a very nice 121 points, 0.69%, at 17,602 and gained 1.8% for the week. The S&P 500 added 9 points, 0.44%, ending at 2,050 and chalked up a weekly gain of 1.3%. The Nasdaq closed at 4,796, 21 points higher, 0.43%, and rose 1.0% last week. That dovish tone also sent the dollar plummeting, to the consternation of the Europeans and especially the Japanese, both who have been implementing monetary policy to strengthen their economies which coincidently weakens their currency. FYI, the Japanese 10 year bond is now yielding a -0.131%, a record low. Folks, the current global accommodating monetary policy is unprecedented in history. Central banks are experimenting in real time. There is no lab for them to practice in.

This morning stocks are mixed around the world and investors and traders are beginning the week cautiously with Dow futures down 33. By the way, S&P P/E ratios are getting lofty again. Also, got to mention the U.S. dollar for that has been a big driver of late. It is marginally stronger this morning.

Oil

Profit taking came in ahead of the weekend with WTI closing down 76¢ and back below $40 at $39.44 and Brent fell 34¢ at $41.20. However, the slippery stuff had a good week with WTI up 2.4% and Brent adding 2.3% and both about 30% higher than mid-January low. The market has been focusing on U.S. production which has been decreasing per the EIA. Additionally, folks are talking about the meeting in Doha, Qatar on April 17th to discuss freezing production levels.

The higher prices are beginning to impact the rig count. Baker Hughes reported in its weekly rig count report actually increased by 1 after 12 consecutive weeks of decline. Now 1 rig is not going to change aggregate production levels but it does give us a rough idea of what price producers need to at least break even. However, we’re going to need an increase in the rig count to stabilize U.S. production. Production for an average shale oil well declines 50% the first year and another 50% the second year so you can see we need to drill some wells to arrest that decline.

Today the April WTI contract expires and like equities the morning is starting out quietly with it down 9¢.

Natural Gas

Natural gas prices retreated a bit after a strong run last week closing down 2.9¢ at $1.907. Pretty surprising to me is that with U.S. production at current levels and the fact we’re going to exit the winter with a record amount of gas in storage natty is above $1.90. Impressive. It looks like traders are looking at exports of LNG and exports to Mexico along with the record levels of gas burned in electric generation to support this market. And the first “formal” summer forecast which is showing an above normal temperature summer. I believe that although this forecast just hit the news, private summer forecasts showing a warm summer hit the market a couple of weeks ago which drove prices higher. Natty down 6.1¢ this morning.

Although Boston did get dumped on with snow this weekend that should be melting pretty quickly and the U.S. is rapidly entering, actually has been in, a no load scenario. Which coincides, with nuclear maintenance. During the first half of 2016 it’s expected that 29 nuke plants representing 30,722 MWs are expected to be shut down for refueling. That’s a heck of a lot amigos! The average outage time is about 35 days.

Have you heard about the Ivanpah project. The Ivanpah project is a solar thermal system located in the California Mojave Desert and began operations in 2013. The project was designed to help California meet its state mandated, and expensive, goal of having 33% of the state’s electricity needs met with renewable resources by 2020 and 50% by 2030. The project came with a $1.5 billion loan from the U.S. government. Well it appears the project is not meeting trend lines for what it was designed. Now this is a cutting edge project so one must give the project a little slack. But here’s the rub I have. The negotiated price that PG&E, the northern California utility, is buying the power produced by the project is $200 per Megawatt hour. Now this probably doesn’t mean much to you but let me put this in perspective. The average ERCOT Houston zone price of power last month was $15.49! That’s not a mistype. Now Texas currently does have very low electricity rates but natural gas fueled electricity can easily be found at $35/ MWhr and other solar facilities produce power at $57/Mwhr. PG&E has considered renegotiating the contract which was signed back in 2009 before the collapse of natural gas and oil prices because it is so wholly out of line with current market prices. However, it looks like our Department of Energy may be coming to the rescue saying recently it is considering using taxpayers’ money to keep the unprofitable business, which we already loaned a $1.5 billion, afloat. Your tax dollars at work.

Blog Weather 3-21-16
WEATHER BAR IMAGE FOR BLOG
Courtesy of MDA Information Systems LLC

Elsewhere

If you’ve ever flown Southwest Airlines you’ve flown on the workhorse of the airline industry, the Boeing 737. It’s the only plane Southwest flies. There’s been the 707, 727, 737 and 747. So who came up with the naming convention for Boeing aircraft, i.e., a “7” followed by a single digit followed by another “7”?

When Boeing shifted from propeller airlines to jets in the late 1950’s it began numbering anew with the 707. Like pi, it’s a number familiar to engineers: 7,0 and 7 are the first 3 digits in both sine and cosine of 45 degrees. Swept wings, ones that angle backward as opposed to 90 degrees to the fuselage, were new at the time. The story goes that the name 707 came from the angle of the wings. Only problem is that 707 relates to a 45 degree angle and the wings were swept at only 35 degrees.

Following WWII Boeing’s president organized the company’s product lines into blocks of 100. The 600 block was reserved for rockets and missiles and the 700’s for commercial aircraft. The first plane was proposed to be named the “700” but the marketing folks didn’t like the sound of it. “seven-oh-seven” sounded sexier. Additionally, James Bond was all the rage and it had a ring similar to “double O seven.” The naming tradition has been carried down for decades.

Internally, Boeing is traditionally noncommittal about the name of an aircraft before its released. The 787 started out as the 7E7 with the “E” standing for efficiency, but the E was switched to an 8. Eight is considered good luck in China and China was a rapidly growing market for Boeing. (The summer Olympics in Beijing began at 8:00 PM on 8/8/08). However, the 787 initially also had a third name with officials at Boeing prepared to call it the Global Cruiser. There was so much discussion over what the name should be that Boeing decided to put it to the world’s population to decide, by vote. A short list of possibilities was put together and distributed globally. Over 500,000 from 160 countries cast ballots and the winner was Dreamliner, but by a margin of only 2,500 votes.

Not surprisingly, rumors have already been flying (pun most definitely intended!) about what Boeing should name future planes. Seven-ninety-seven is the obvious choice for the next plane but what about after that? The 807? The 7-10-7? It’s a bridge Boeing will have to cross down the road but one thing is for certain, the company will get a lot of free publicity out of it.

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