Good morning. It’s good to be back after a week of business travel. The last Morning Energy Blog was published Friday September 11th reflecting what markets did the day before on Thursday the 10th. Let’s see what’s transpired since that time. On that Thursday the Dow closed at 16,330, the S&P 500 ended at 1,952 and the Nasdaq closed at 4,796. Last Friday the Dow closed at 16,384, the S&P at 1,958 and the Nasdaq ended at 4,827. So doing some simple math, the three indexes on the week were all down 54, 6 and 31, respectively. Now this really isn’t much but it is unfortunate for going into Friday equities were having a good week. The big news last week was on Thursday when the Fed announced they were not raising interest rates stating that although the U.S. economy was doing OK events in the global markets convinced them to be conservative thus leaving rates unchanged. Those “events” are a slowing of the Chinese economy. The markets closed flat that day but overnight last Thursday investors digested the data and woke up Friday interpreting the Fed’s not raising interest rates as a message the global economy was not growing and an economy that is not growing is not good for equities. Thus, on Friday everyone hit the sell button and stocks gave up all their gains of the week with the three major U.S. indexes falling between 1.2% and 1.4%. This market has been really tough on us lately. Here’s a statistic for you. This is the first time in 21 years that we’ve had 11 alternating weeks of gains and losses for the S&P. That’s a market that gets you all excited only to let you down.

Ok. It’s a new week and we’re getting off to a good start. Dow futures were down when I first came into the office but have rallied nicely and are up an even 100 points currently. What’s going on is, and this isn’t unusual especially on a Monday morning, is all the European bourses are trading in the green which is supporting U.S. markets. As I’ve said so many times, it’s good to be up starting the day but it’s the close that really matters. Bear markets open higher and close weak. Let’s hope the bear stays in his cave today.

Oil

A week ago Thursday WTI and Brent closed at $45.92 and $48.89, respectively. Last Friday WTI closed at $44.68 and Brent at $47.47 so the oils lost $1.24 and $1.42, respectively and on a percentage basis fared worse than equities. Similar to equities, Friday was a bad day for oil, and all commodities, with WTI losing $2.22 and Brent $1.61.

This morning WTI is bouncing pretty well being up $1.25 on two data points. First, on Friday after the market closed, Baker Hughes reported that for the 3rd consecutive week the number of oil rigs dropped, this time by 8, to 644 rigs. This compares to 1,601 this time last year. So over the last 12 months the number of rigs looking for oil has dropped 60%! That’s material amigos. We’re just beginning to see U.S. production decline, albeit not at the rate analysts expected. Expectations were for a drop in U.S. production of 1 million bpd. We’re seeing the actual at 500,000 bpd. Producers have been very resourceful maintaining their productivity. One of the facts that has kept production higher than otherwise are producers’ hedges. They’ve probably got 50% to 75% of their 2015 production hedged. It will get much more tougher in 2016 for most producers have a maximum of 50% of their production hedged with the average probably around 25%. Thus, lower oil prices are going to be felt much more next year. Second, equities are higher which almost always tends to support oil prices.

Courtesy of MDA Information Systems LLC

Natural Gas

A week ago Thursday the October natural gas contract expired at $2.683. Since then it’s slipped a little closing Friday at $2.605, down 4.7¢. This morning natty continues to erode with it down 5¢ as I write. I think the combination of the shoulder season in conjunction with folks now really starting to believe the El Nino will impact the weather this winter, in a warmer way. The NOAA came out with their October weather forecast today and it shows the eastern third of the country to be above normal with the eastern seaboard from Virginia north to Maine to have above normal temps. That will slay the natty bull. That being said, the lower the natty prices go the more coal to gas switching supporting demand. And don’t forget, we’re getting into nuclear plant refueling season with an above normal season predicted which will result in more natty being burned.

Elsewhere

Volkswagen AG is having a very bad day today. The stock is down a stunning 18.1% today and near a 3 year low. The market’s reaction follows accusations by the EPA that the German car maker rigged U.S. emissions tests for about 500,000 diesel cars. The EPA stated VW used a device programmed to detect when the cars are undergoing official emissions testing. The software device then turns off the emissions controls during normal driving situations allowing the cars to emit more than the legal limit of pollutants. Volkswagen marketed the diesel power cars as being better for the environment. In addition to have to recall the 500,000 cars the company could be hit with a fine of $37,500 per vehicle which totals more than $18 billion. That’s gotta hurt! (However, it is unclear if the government will seek the onerous penalty).

This isn’t the first time the U.S. officials have gone after car companies. In November 2014 the EPA hit South Korean auto makers Hyundai Motor Co. and Kia Motors Corp. with a record $100 million penalty for overstating fuel economy claims and forced the companies to pay another $200 million in regulatory credits.

Have a nice day.