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Morning Energy Blog – October 24, 2017

Equities and the Economy:

• Stocks end 6 session win streak.
• Markets bivouacking.

U.S. stocks closed lower yesterday snapping their 6 session winning streak. The Dow fell 55 points to 23,274, the S&P 500 lost 10 points ending at 2,565 and the Nasdaq dropped 42 points to 6,587. Momentum was waning and profit taking came in. No big deal. Let’s call it resting. Bivouacking. Like an army that has advanced, it must pause for the supply lines to be reestablished. The market is overbought but solid corporate earnings and prospects of a tax cut remain a tail wind.

The only economic report of significance yesterday was Markit’s September U.S. Manufacturing PMI which came in at 53.1 and up from August’s 52.8. This was quite impressive being we had Hurricanes Harvey and Irma disrupting supply chains.

Corporate earnings will continue to be investors’ focus this week. Heavy-weight Caterpillar released this morning beating expectations and its share price is up 6.7% in pre-market trading pulling the entire market higher. The Dow is up a hefty 133 points.

Oil

• Prices end mixed.
• Northern Iraq remains in focus.

Oil prices ended little changed yesterday with WTI closing up 6¢ at $51.90 and Brent settling down 38¢ at $57.37. Chatter. Traders focus continues to be on northern Iraq where the Kurds and Iraqi nationals continue to skirmish which has increased the fear premium in oil prices. Oil production from the region has been reduced and while the Iraqi government has stated they will increase production from the south to offset the reduction in the north, the country’s net production is down 110,000 bpd.

I mostly discuss supply, but global demand has materially contributed to higher oil prices. Asian demand has been strong, especially from India, and only expected to grow in the future.

OPEC released data stating that compliance with the production cut agreement is 120%. It didn’t list compliance by county, only the aggregate. I believe Saudi Arabia is doing the heavy lifting here and quite probably producing below its allowed quota. And they’re going to continue to do it for at least a year. Here’s why (and you’re going to hear this repeatedly from me over the next 12 months). Next year Saudi Aramco is going out for its first IPO offering 5% of the company to the public. This will be the largest IPO in history which is expected to bring in to the Kingdom about $100 billion. Saudi Arabia MUST keep oil prices elevated to ensure a successful IPO.

This morning WTI is up 50¢ being carried higher by a weaker U.S. dollar and jitters surrounding geopolitics.

blog weather 10-24-2017
WEATHER BAR IMAGE FOR BLOG-
Courtesy of MDA Information Systems LLC

Natural Gas

• Stronger cash prices lift market.
• Weather forecast revised cooler.

The cool front that swept through the midcontinent and over the weekend resulted in Midwest utilities coming in short cash gas yesterday which drove cash prices higher pulling up futures contracts. The November contract gained 7.6¢ to settle at $2.991, so close to that magic “$3.00,” which is the price around which the market has broadly traded for 5 months now. Over the past couple of days natty has rallied about 9% off the two month low of near $2.75 to present levels. The all-important calendar strips ended little changed from Friday.

Whereas a couple of weeks ago I was talking about a warm Halloween, it looks like now the trick-or-treaters in the Midwest will be wearing coats for below normal temperatures are predicted for the next 6-10 days there. Shifts in the weather forecast are going to be the major price driver over the next 5 months. This morning natty is little changed down 2.3¢.

Elsewhere

Quantum mechanics. A term everybody knows, but nobody understands. There’s no quick explanation but it goes something like this. Scientists have proved that atoms can exist in two states at once (did your brain just explode?!). The phenomenon is called” superposition.” For example, a single atom can be in two locations at one time. Because everything is made of atoms, some physicists theorize that entire objects can exist in multiple dimensions allowing for the possibility of parallel universes. These laws are behind the next revolution in computing. Two dozen Google physicists and engineers in Santa Barbara, CA are harnessing quantum mechanics to build a computer of potentially astonishing power. Companies and universities around the world are racing to build these machines. Early next year Google’s quantum computer will face its acid test in the form of an obscure computational problem that would take a classical computer billions of years to complete. If successful, it would mark “quantum supremacy,” the tipping point where a quantum computer accomplishes something previously impossible.

Classical computers store and process information using bits, which have a value of 0 or 1. Quantum bits, or qubits, use superposition to exist in both states at once. In a classical computer, bits are like coins that display heads or tails,. Qubits are like coins spinning through the air in a coin toss, showing both sides at once. This dynamism allows qubits to encode and process more information than bits do. How much more? The computing power of a data center stretching several city blocks could theoretically be achieved by a quantum chip the size of a period at the end of this sentence!

If all this is confusing, don’t feel alone. In an interview recently Microsoft founder Bill Gates said quantum computing is “the one part of Microsoft where they put up slides I truly don’t understand.” I especially liked what Nobel Prize winning theoretical physicist Richard Feynman said, “I think I can safely say that nobody understands quantum mechanics.”

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