The Energy Report 12/18/19

Last Christmas

Last Christmas, my stocks fell apart. Had profits that day but then gave them away. This year, to save me from tears, I’ll pick up and buy some put options. Last Christmas,  I looked at my chart. But before I could trade, the bids went away. This year, Santa’s rally is here, so it might bring us something special. Once bitten and twice shy, I keep my distance but stocks still catch my eye. Bullish Baby. They are on buying spree. Well, it’s been a year, it doesn’t surprise me. (Merry Christmas!) I brought it up and meant it. Then I took my money and spent it . Now I know what a fool I’ve been but if the market sold off, I know I’d buy it again. Last Christmas, my stocks fell apart. Had profits that day but then gave them away. This year, to save me from tears , I’ll  pick up and buy some put options.

Last Christmas was a washout for stocks. The drive lower was led by the energy markets that was burned when President Trump granted waivers on Iranian oil. That, along with the trade war, raised fears that we would soon be in a recession. What a difference a year has made for stocks as Santa has delivered a record-breaking rally. Oil was getting caught up in the stock market enthusiasm yet may pause after a surprising jump in U.S. oil inventories.

The American Petroleum Institute (API) reported that U.S. crude oil inventories surged by an astonishing 4.7 million barrels last week. Gasoline supply also reported an increase of a whopping 5.7 million barrels and distillate by 3.7 million barrels, numbers that would suggest slowing demand.

Yet despite this big increase in supply, the big picture for oil looks bright as demand expectations are rising. A slew of strong U.S. economic data should point us in the right direction. The Santa Clause rally is already in town and despite the big build in inventory, oil and product demand will start to reflect the strong economic data we have been getting. For example, as the AP reported, “U.S. industrial production snapped back last month, posting the biggest gain in more than two years, boosted by the end of a strike at General Motors. The Federal Reserve said Tuesday that industrial production — which includes output at factories, mines and utilities — rose 1.1% in November, reversing a 0.9% drop in October and recording the biggest jump since October 2017.”

Manufacturing output climbed 1.1%, carried higher by a 12.4% surge in the production of cars, trucks, and auto parts. The GM strike ended in late October. Excluding the auto industry, industrial output rose 0.5% last month and manufacturing output rose 0.3%. Housing data also suggest more oil demand. Housing starts and permits for future construction in November rose to more than a 12-year high, according to the Commerce Department. The figure came in at 1.365 million units, which was above the 1.345 million units that economists had predicted for the month. Building permits came in at 1.482 million units, its highest level since May 2007.This bodes well for the demand outlook for oil products. Despite big upticks in inventory, we should see demand and OPEC and shale production restraints start to reduce any oversupply. We are buying the break but be aware of crazy holiday sell-offs like last Christmas.

Andy Weissman of EBW Analytics writes, “natural gas futures are staring at the demand for the commodity being slashed by up to 10 Bcf/d next week on blowtorch warm weather and the Christmas holiday, likely requiring salt storage operators to step up and absorb excess supplies to prevent a price collapse. Interestingly, the January gas contract lost 98 Bcf of demand over the past ten days—but only 1.6¢/MMBtu. If bulls can survive next week, the outlook for January would appear guardedly optimistic. Colder signs are emerging in DTN’s new 16-30 day outlook, perhaps heralding a shift away from an extremely bearish December to-date.      By January, a sinking year-over-year surplus, faltering production growth, and expanding LNG output may support a natural gas rally. Near-record high net short positioning may foreshadow short-covering ahead.  Still, we expect any move higher for NYMEX gas to be short-lived. Bearish fundamentals for the 2020 injection season are likely to lead prices lower by March—if not sooner. US electricity demand is expected to sink next week on fading demand and the Christmas holiday—slashing power sector natural gas demand 2.9 Bcf/d.”

Invest in yourself this holiday season. Tune to the Fox Business Network where they are invested in you.

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In case you missed it! Phil’s guest appearance on the McKeany-Flavell Hot Commodity Podcast last Friday, September 20th talking about current energy market dynamics. LISTEN HERE!

Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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