Energy Market Watch: August 2016

July 29, 2016 Allison Schweizer

Energy Market Watch: August 2016

We’re entering the end of the summer, which means vacations are wrapping up, children head back to school while adults head back to sanity, but the energy market continues it’s craziness. Bring on August, and with it new key dates and events that will have a major impact on the financial and energy markets. And while you cheer on your country during the Olympics, remember, these markets have no loyalties.

August 4th – Bank of England Interest Rate Decision

London, UK - June 24, 2016: People walk past a newspaper banner in which The Evening Standard in London reflects the news that the UK has voted to leave the EU, and its PM David Cameron has resigned. These papers were seen on the streets of London, near Charing Cross.While the Bank of England has long been one of the world’s most powerful financial institutions, it often finds itself in the shadow of the European Central Bank and the US Federal Reserve.  That’s certainly not the case in the current market, as the Bank of England has been pulled on to center stage following the recent Brexit vote.  In mid-July, the Bank surprised global markets by opting not to lower benchmark interest rates – a move many considered likely amid the Brexit-induced turmoil.  They’ll have a chance to review that decision as the month kicks off, with plenty of uncertainty still swirling.  While a lower rate theoretically stimulates investment and ensures access to credit, it would also further weaken an already battered British pound.

While that question can be discussed at length, the issue at hand is (as always) “why does it matter for energy?” The answer is no less complex, but here’s several decades of macroeconomic theory in a relatively straightforward chain:  A lower Bank of England rate means a weaker pound, thus a stronger dollar, which generally marks a fall in commodity prices (particularly some of those in the energy sector).

August 15th – EIA Drilling Productivity Report

The August edition of EIA’s somewhat overlooked report should offer an important look at a pivotal time for America’s oil and gas producers.  With the August print serving up July data, the market will get a deeper look into how producers in different regions have responded to a rise in prices from earlier year lows.

For the crude complex, July offered a continuation of June’s sporadically increasing rig counts, which helped to push summer prices lower. While production is generally expected to continue dropping from now, EIA’s report sheds light on how efficient any new rigs might be, and which shale plays might move higher. The release of the Drilling Productivity Report will give a better indication of whether rig prices have a meaningful impact on production.

On the natural gas front, production has struggled to contend with last year’s levels. A sharp drop was prevented, largely because Marcellus and Utica continue to look especially strong. The upcoming Drilling Productivity Report will not only provide the latest production figures, but will also show the market EIA’s latest projections, with any downward revisions capable of propelling prices higher.

August 17th – US Federal Open Market Committee minutes

Wall Street sign, downtown Manhattan, New York CityThe Fed doesn’t have an official meeting scheduled, but that doesn’t mean they’re ready to let other central banks have all the fun. On August 17th, they’ll release official minutes from July’s meeting, which is almost as anticipated by global markets as the meeting itself.  While we’ll already know the interest rate results by then – with expectations swinging firmly in favor of no change – the minutes will provide valuable insight into what Janet Yellen’s worried about (hint: Chinese growth rates, lack of inflation, and Donald Trump’s desire to tell her “you’re fired.”)

As always, any action by the Federal Reserve tends to impact equities, currencies, and thus, commodities. The S&P will be paying attention, but so will Brent & WTI, which can have a trickle-down impact on some of the world’s natural gas and electricity prices.

August 26th – GDP numbers

GDP growth – everyone wants it, but nobody seems to know how to make it happen.  That’s been especially true among the world’s most developed economies, like the US and European GDP, where growth is lagging behind targeted levels.  Of course, one round of GDP numbers isn’t going to do much to rewrite a long-term trend.  But for better or worse, US GDP numbers are among the world’s most-watched economic indicators, subtly shifting demand expectations for virtually all things capable of bearing a price tag.  That includes energy, since GDP growth expectations hold a close connection to any country’s overall energy consumption.

August 31st – EIA Petroleum Status Report

At the gas stationThe EIA’s Petroleum Status Report may be a weekly release, but that doesn’t mean that certain editions don’t stand out.  That’s certainly the case for the report’s final August edition, where crude product fundamentals may make a last ditch effort to reduce an increasingly problematic glut of refined fuels.

August marks the last full month of summer driving demand, with a sharp drop in vehicle fuel consumption in September. As a result of low fuel prices, driving demand in the US has been especially strong in 2016, but the problem for oil bulls is that record demand has done very little to undermine a substantial oversupply of refined products like gasoline and diesel.  While a drop in crude stocks helped propel an oil price rebound earlier in the year, product stocks have continued climbing, resulting in more than 1.4 billion barrels of crude and refined products in US storage facilities.  If those inventories make it through August’s final inventory report without any clear signs of weakening, crude and crude product prices could be in for a tough winter.

August is shaping up to be a month full of numbers, reports, and big decisions – check back next month when September inevitably one-ups it.

The post Energy Market Watch: August 2016 appeared first on Schneider Electric.

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