Energy Market Watch: December 2016

While the calendar suggests that we’re closing in on the 366th day in 2016 — thanks for the extra 24 hours, leap year — it’s almost impossible to believe. This year seems to have moved at a breakneck pace. And that’s feels even more true as we turn an economic eye on December with the 16’s the final Energy Market Watch.

For many, December brings family and holiday festivities, but energy markets refuse to take a vacation. It’s fitting then that the U.S. closes out 2016 with some of the most important dates yet, from a likely Fed rate hike to a formalized president-elect.

That may seem disconnected from everyday life or even energy bills, but don’t worry. In fact, this type of market analysis is often best left to some of the world’s more quotable personalities who can offer context and clarity on upcoming events (even if they didn’t mean to). Curious what Mark Twain may have to say about OPEC? Read on!

December 13-14: Federal Reserve meeting

While the Fed never suffers from a shortage of expert opinions, the best take may come from the late Yogi Berra who said, “It’s déjà vu all over again.” That’s a reasonable conclusion considering the Federal Reserve has essentially earned a standing place on the monthly calendar throughout 2016. However, after balking at the chance to hike rates throughout the year, it appears that, “The future ain’t what it used to be.”

More specifically, federal funds futures aren’t what they used to be with recent trading through the Chicago Mercantile Exchange indicating a 95 percent market expectation of a December rate hike. Combined with a strong dollar and a stock market hitting all-time highs, Janet Yellen & Co. appear to have a definitive green light to raise rates. Continued hikes generally translate to more expensive debt, which are a major factor for capital-heavy energy projects. That means financing projects like wind and solar farms is likely to get (slightly) more expensive if the current trend continues. Of course, until the Dec. 14 announcement, nothing is guaranteed.

Or in other words, “It ain’t over til it’s over.”

December 14: OPEC’s Oil Market Report (OMR)

Mark Twain famously suggested that “lack of money is the root of all evil.” However, for members of the Organization of Petroleum Exporting Countries (OPEC), a growing lack of money is rooted in persistently low global oil prices. That has members increasingly ready to consider coordinated efforts to boost the market, either by capping or cutting current oil production.

However, Twain also said to, “Get your facts first and then you can distort them as much as you please.” For countries like Iraq and Iran, recent accusations claim those country’s self-reported oil production levels have contained a bit of fiction. Independent analysts as well as competing producers suggested some OPEC countries artificially inflated their production data in order to mitigate the impact of any potential “production freeze” requirements. While any deal would likely rely heavily on independent analyst assessments, production totals in December’s publication are sure to be heavily scrutinized by the oil market and, in turn, the many energy prices that can be influenced by crude costs. In the meantime, remember Mark Twain’s famous words (which he never actually said): “A lie can travel halfway around the world while the truth is putting on its shoes.”

December 16: Quadruple Witching

In his famous Hitchhiker’s Guide to the Galaxy series, Douglas Adams wrote “I love deadlines.  I love the whooshing noise they make as they go by.” Despite sounding like a horror movie sequel, quadruple witching is essentially the whooshing by of simultaneous expiration dates for four key contract types — stock options, stock futures, index options and index futures. For U.S. markets, that typically means a significant spike in trading volume and volatility, ensuring Wall Street’s traders agree with Adams observation that, “Time is an illusion. Lunchtime doubly so.” Compounding those factors, December’s quadruple witching day will likely follow an interest rate hike only 48 hours prior. Those are major factors for the market’s overall performance, in turn impacting the valuation of publicly traded companies.

If the market manages to take the volatility in stride, it could suggest economic strength for the year ahead, boosting expected energy demand and offering a bullish lift for prices. Additionally, a stronger share price can contribute to a more favorable climate to secure financing for energy efforts like oil and gas exploration, or a renewable power purchase agreement.

While that may be little comfort for those on the wrong side of option expiry, remember, “You live and learn. At any rate, you live.”

December 19: Electoral College Votes

If Johnny Carson’s “Carnac the Magnificent” was still practicing, he may have offered the following: “The Electoral College, party caucuses and Donald Trump’s hairstyle – three things we all know are politically important, but don’t really understand.” While the latter two are likely to remain shrouded in mystery until at least the next election cycle, the first item will take center stage later this month. While the topic deserves far more examination than this analysis will attempt to offer, below is the annotated version.

On Dec. 19, members of the Electoral College will formally vote in the next president of the United States. While Carson may have claimed, “Democracy means that anyone can grow up to be president and anyone who doesn’t grow up can be vice president.” There’s only one realistic winner this month. Simply put, barring a truly unprecedented series of events, the Electoral College will confirm Donald Trump as the next president of the United States. While that may elicit a wide range of opinions, the energy market impact is a bit clearer.

Donald Trump’s administration will likely prevent implementation of the Clean Power Plan from the Environmental Protection Agency and pursue lighter regulations on fossil fuel production. At the same time, last year’s extension of major tax credits for wind and solar projects mean favorable treatment for renewable projects throughout the next president’s term.

The net effect? Renewables are still set for growth in the coming years and coal generation is still poised to decline, regardless of who sits in the Oval Office.  That’s due to a combination of potential policy paths, current economics and the steadfast reliability of congressional gridlock. As Carson expertly quipped: “Unlike communism, democracy does not mean having just one ineffective political party, it means having two ineffective political parties.”

And that’s a wrap, 2016!

Not to fret, energy markets never quit so check back in 2017 to get the low down on the new year.

In the meantime, Happy Holidays!

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