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Morning Energy Blog – September 7, 2016

Equities and the Economy:

U.S. stocks continue to climb the Wall of Worry closed marginally higher yesterday with the Dow up 46 points to 18,538, the S&P 500 up 7 to 2,186 and the Nasdaq up 26 to 5,276 which is a record high for the tech heavy index! By the way, climbing the Wall of Worry is bullish. It means there’s concern out there which means money is on the sidelines. When everyone is bullish is the time to beware, and definitely not everyone is bullish right now. Equities moved higher on bad economic news. Yes, that’s not a typo. The Institute of Supply Management released its Non-Manufacturing (i.e., service sector) Index for August and it came out an abysmal 51.4 which is the lowest reading since February 2010. Economists were looking for something around 55.0 which even then is slightly lower than July’s 55.5. Now as you know I’m a glass is half full person and the good news is that the index has been above 50, the demarcation between growth and expansion, for 85 consecutive months. Investors took the news that the Fed will be in no hurry to raise interest rates. The S&P is up a nice 7% y-t-d. On the lousy ISM report the dollar fell sharply, and bonds rallied, which was good for commodities priced in U.S. dollars.

This morning the market is feeling a little pressure with the Dow down 55 points.

Oil

Crude oil prices ended mixed yesterday after the world’s two largest oil producers, Russia and Saudi Arabia, said they would cooperate on investigating ways to manage oil production, i.e. manage oil prices, to tackle the current global supply glut. As I mentioned yesterday, this all is a lot of jawboning to get prices up, and they really aren’t up much. WTI spot prices have been trading between $40 and $50 since March after hitting a low of around $26 in February. Now the argument could possibly be made that without this “jawboning” prices would be lower, possibly below $40, but I’d be a buyer below $40. It would be extremely surprising if OPEC and Russia froze or limited production because 1) they need to fill their coffers, 2) Iran is excluded from the production freeze and that is Saudi Arabia mortal enemy, and 3) Saudi Arabia is no longer the world’s marginal producer, the U.S. is, and as I stated yesterday, it’s the marginal producer that sets the price of a commodity. Yesterday’s numbers were WTI up 39¢ at $44.83 and Brent down 37 to $47.26. All I know is the price term structure, i.e., the spread between the front month and the one year month (Oct ‘16/Oct’17) has widened telling me crude is bidding more aggressively for storage.

Apache Corp. just announced it has discovered the equivalent of at least 2 billion barrels of oil in a new west Texas field that they’re claiming has the promise to become one of the biggest energy finds of the past decade. The discovery, which Apache calls “Alpine High,” could be worth $8 billion by conservative estimates. Apache claims it could be worth 10 times that amount. The area is near the Davis Mountains and has been overlooked by geologist and engineers who believed it would be a poor fit for hydraulic fracking. Apache is convinced they’ve got the code to unlock the massive reserves. Don’t ever underestimate the resolve and innovation of the American oil and gas producer!

This morning WTI is quiet with being up 24¢. Chatter.

Blog Weather 9-7-16
WEATHER BAR IMAGE FOR BLOG-
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Natural Gas

After the holiday weekend the weather forecast came in cooler and natural gas prices got whacked yesterday with the October Nymex contract falling 7.5¢ closing at $2.717. Basically, the two week forecast lost about 2 Bcf of demand. Putting fuel on the fire for the bears was U.S. dry production increased about 0.4 Bcf/d from Friday. Natty prices have been under pressure for the last 1 ½ weeks falling 25¢, 8.5%, to a two week low of $2.693. The current hot spell in the eastern U.S. while abating in the 6-15 day time frame remains warm which will keep those A/C units running during the day time increasing gas use. Traders don’t seem too concerned though for natty is down 3.8¢ as I write.

I’m not sure you’ve followed this story but as hydraulic fracking has exploded in Oklahoma, so has the number and size of earthquakes in the state. Whereas 10 years ago earthquakes were infrequent and small, on Saturday Oklahomans felt one of the strongest ones in the state’s history registering 5.6 on the Richter scale. In response the Oklahoma Corporation Commission’s Oil and Gas Division ordered 37 waste water injection wells in northeastern Oklahoma to be closed. You may be wondering what the connection is here. It’s not the actual fracking itself that is causing the earthquakes. It’s believed that the waste water that is produced from the fracking and injected deep into the ground via disposal wells is “lubricating” the formation the water is injected into increasing the propensity for earth movement.

Elsewhere

Last week marked a milestone in U.S./Cuban relations. JetBlue’s flight 387 from Ft. Lauderdale to Santa Clara, Cuba marked the first regularly scheduled commercial flight between the Cold War foes in 55 years. The flight took a whopping 51 minutes. Nine other U.S. airlines will soon follow with up to 110 flights per day proposed. U.S. Transportation Secretary Anthony Foxx was the first to disembark sharing a toast of white wine with his Cuban counterparts to mark the occasion. The number of Americans visiting Cuba has been rapidly increasing. In 2015 about 161,000 made the journey, a 77% jump from 2014. That number jumped another 80% in the first three months of 2016. By the way, the U.S. still maintains and economic embargo on the communist island.

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