The Energy ReportPhil Flynn
The Energy Report 07/29/16
Oil and Gas Opposite Directions
Oil prices dipped into a bear market as natural gas soared on the smallest inventory injection in a decade. Oil prices continue to feel the fallout from the Brexit as it has reduced demand expectations and sent the dollar soaring. Natural gas had seen selling pressure because of weakness in crude oil but could not ignore another huge miss on inventories raising concerns about the perception of adequate supply as we head into winter.
The Brexit vote was one of the major issues that I warned could impact crude oil market direction. It is also driving safe haven buying into the dollar. The rise in products, not normally a concern, is normal at the bottom of the crude oil cycle. Yet with reduced demand, the product side of the equation looks astronomical as it is coming against seasonal weakness. Oil is coming into key psychological support at $40.00 a barrel and could extend to $38.00 if breeched.
The $40.00 area may hold as the dollar is retreating after the Bank of Japan disappointed traders that hoped for helicopter money and instead saw the bank keep rates steady minus 0.1 percent and said it would continue purchasing the same amount of government debt.
An accelerating drop in oil prices threatens a five-month rally in high-yield energy bonds, reigniting the relationship between the two asset classes as crude approaches bear market territory. Prices for high-yield energy bonds have fallen for eight consecutive days, following a decline in the price of U.S. oil towards $41.00 a barrel, its lowest level since April.
Natural gas soared as once again the record heat caused a below average injection of 17 billion cubic feet and cut the surplus on the five-year average to 18.9%. The supple cushion that was at one point well above 50% was thought to have as much a chance of declining as Donald Trump had to win the Republican nomination for president. Now even the bears are starting to wonder if we can stay above average as we continue to miss badly on injections. With record heat and record power burns it is it is clear that next week will be another miss and we could actually see a withdrawal from storage. Bloomberg News Points out that, "Parts of the Northeast and the mid-Atlantic are experiencing a heat wave this week. The high temperature in Washington Thursday will be 93 degrees Fahrenheit (34 Celsius), topping 90 degrees for the eighth straight day, AccuWeather Inc. said on its website. The heat will persist into next month. Gas futures extended gains after a midday update to a government weather model showed above-normal temperatures in the Northeast and Great Lakes region Aug. 7 through Aug. 11. Power generators are burning about 36.2 billion cubic feet a day of gas so far this month, up 9.6 percent from a year earlier, PointLogic Energy data show." This may call into question of perception of adequate storage as we head into the winter. I will be examining the implications of what could be a channelizing winter in a new special report that will soon be released.
Hillary Clinton's historic nomination for President of the United States is already raising concerns about here future energy policy. In a Wall Street Journal Op-Ed Karen Alderman Harbert, the president and CEO of the Institute for 21st Century Energy at the U.S. Chamber of Commerce, warned that Hillary Clinton helped rewrite the Democratic platform on energy in ways that make Obama look moderate. Ms. Harbert wrote that, "Energy policy took center stage as supporters of Bernie Sanders and Hillary Clinton argued for weeks over the extent-but not the direction-of new regulatory restrictions to limit U.S. energy production. These divisions trace to early spring, when Sen. Sanders worked to distinguish himself as the candidate most committed to stringent climate regulations and new federal rules to halt fracking. The tactic rallied environmental activists and Mrs. Clinton responded with a leftward drift that inched ever-so-close to the Sanders position. "I'm going to pledge to stop fossil fuels," Mrs. Clinton promised a voter in New Hampshire before the February primary. A month later she boasted at a debate that, after imposing new regulations, "I do not think there will be many places in America where fracking will continue to take place."
The one-upmanship then moved to platform-drafting as the camps continued to squabble until reaching a conclusion in Orlando, Fla., on July 9. Supported by both campaigns and enthusiastically cheered by environmentalists, the final language stops short of calling for a nationwide fracking ban but incorporates a raft of anti-energy provisions, such as promising new Environmental Protection Agency rules on fracking, instituting a Keystone XL-like "climate test" for future federal permitting, and generally discouraging the use of natural gas. While reports suggested the compromise resulted in a middle-ground position, this couldn't be further from the truth.
The real story of the 2016 platform language is not the squabbling between the Clinton and Sanders camps, but rather that both sides joined to reject the previous positions adopted by candidate Barack Obama and his supporters. Consider this 2012 platform language from a section titled "All-of-the-Above Energy Policy":
Yet it is notable that this year each plank was exiled from the platform with nary a word of discussion. Blanket praise for the importance of natural gas as a job creator was replaced by blanket promises to restrict its production and use. This is a dramatic and troubling about-face. The shale revolution has lowered energy prices and fueled a renaissance in American manufacturing while improving our security by lowering dependence on foreign oil.
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July 29th, 2016
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