As we approach the first potential interest rate hike of the cycle on Thursday (get ‘er done), here is an annotated chart of the S&P500, highlighting its response to various bouts of quantitative easing (aka, stimulus) in the last seven years.
Equities have received a supportive influence from monetary easing. Therefore, should logic prevail, monetary tightening through interest rate hikes should correspondingly provide significant headwinds to equities:
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Next up is from yesterday’s EIA drilling productivity report. Of the three leading shale plays in the US, Eagle Ford has seen production drop by 17% since its peak in March, while Bakken has dropped 6% since its peak last December. Oil production at the Permian shale play, however, has yet to drop, and is set to surpass the milestone of 2mn bpd next month, according to projections:
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Looking to our friends in the South, the below graphic from EIA illustrates why it makes sense for crude oil swaps to have been approved between the US and Mexico last month: exchanging US light sweet crude for Mexican heavy sour crude is a marriage of convenience.
US Gulf Coast refineries are well-suited to process heavy sour crude, but US shale oil plays are largely producing light sweet crude. In contrast, three of Mexico’s six major refineries are not well-configured to process heavier sour crude, while two key Mexican grades produced – Isthmus and Maya – are medium sour and heavy sour crude, respectively. This marriage of convenience should therefore blossom.
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Next up is this chart which shows how solar power accounted for over 5% of California’s total electricity production last year, while wind accounted for over 6%. On sunny and windy days in California, which are plentiful, the Golden State gets as much as 30% of its power from renewables, while there are periods of the day when production can soar to 40%. California’s target of 33% renewables by 2020 is a slam dunk; legislators have just upped the ante to 50% renewables by 2030.
Finally, we swiftly sprint to the other end of the energy spectrum to finish with coal. Metallurgical coal, which is used in the steelmaking process, has seen its global benchmark settle at $89 a metric ton, the lowest level since March 2005. Just as we have seen in US natural gas, and now the global crude oil market, there is a glut of coal in the world, as supply outpaces demand.
Related: OPEC Keeps Up Production In August, Takes Over Market Share
Australia, the world’s largest metallurgical coal exporter, exemplifies why this glut exists. A weakening Australian dollar has offset the drop in coal prices in US dollar terms, meaning Australian coal producers are still generating a return. All the while, demand has fallen as the Chinese economy has slowed; metallurgical coal now has fallen 73% (in US dollar terms) since making a record high of $330 a metric ton in 2011:
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By Matt Smith
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Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01