Happy New Year! As we wrap up the holiday season with an eye on new year resolutions, the energy market shows no signs of slowing down. Nor do they seem too interested in changing, with 2017 looking to usher in another year of volatility, triumphs and tribulations.
Dwight Schrute from the Office famously said “I never take vacations, I never get sick. And I don’t celebrate any major holidays”. This could just as easily be attributed to the world of energy economics. After closing out 2016 with a surprise election, Federal Reserve rate hike and the first OPEC deal in nearly a decade, 2017 hardly has time for a holiday. With January set for anything but a slow start, here are the dates to circle on the (brand new) calendar.
January 1st: OPEC deal becomes effective
In a world increasingly awash with big data and detailed analysis, the Organization of the Petroleum Exporting Countries (OPEC) likes to keep things simple. Sure, we could let the fundamentals of global oil demand dictate supply availability, but where’s the fun in that? OPEC likes to do things old school, with a dozen or so oil ministers deciding these things on their vacations. As a result of those efforts, the oil market is bracing for OPEC’s first coordinated supply deal since 2008, with members (and a few non-members) targeting cuts over the first half of 2017.
This brought some serious tailwinds for oil prices, but the market is still miles below the $100+ oil prices of the pre-2014 price crash. That’s largely because United States shale has become a powerful supply source, limiting OPEC’s ability to push price higher. However, there’s another important factor: OPEC members historically cheat against designated output quotas. The market expects most members to fall a bit short of their targets, but exactly how much remains a serious question mark. Beginning in January, the answer to the question will take its first steps past speculation and into a data-driven answer. If OPEC’s cuts come in below expectations, oil prices (and the resulting energy domino) will fall.
January 4th: FOMC Minutes
The minutes from the Federal Reserve meeting are bit like being handed the book after already seeing the movie. Sure, we know the basic plot and the ending, but there’s some meaningful details that might’ve been left out. In December, Janet Yellen and the U.S. Federal Reserve announced the first interest rate hike of 2017. With the market expecting the move, stock portfolios and bond yields barely blinked. Sure, the dollar surged higher, but that was a continuation of a move that began well before Yellen & Co. made things official.
The real question yet to be answered is when the next hike is coming. While much of that answer will depend on data points still to come, the upcoming FOMC minutes will give a bit more indication into what the Fed’s voting members are thinking today. As such, expect the FOMC minutes to impact the dollar, which generally affects oil, liquefied natural gas (LNG), coal, and other key energy prices in short order.
January 6th: US Employment Situation
While there are many factors that go into a central bank’s decision on interest rates, few reports carry more weight than the U.S. Employment Situation. Published by the Bureau of Labor Statistics, the employment rate holds some of the most cited statistics for the American economy. Skating above a more detailed breakdown, the overall unemployment rate is typically among the most cited figures in economics. It’s also one of the few bipartisan topics as everyone likes seeing the number go down.
For the Federal Reserve, the number has some added significance, since “full employment” is a critical component of their overall mandate. Strong numbers could be the first major piece of evidence in 2017 towards an early rate hike. That’s also due to the fact that December’s numbers (which the January report will show) tend to be a bit more interesting than most as seasonal employment trends come under the microscope. Of course, while rate talk impacts anything with a price tag, we’re most interested in energy specifics.
To that end, unemployment is also a key indicator of energy demand. When people have jobs, they’re more likely to buy a car, drive said car, and also crank up the thermostat a few more degrees. In short, employed people consume more energy. So while the employment situation will have a guiding hand on the entire economy’s steering wheel, the grip on energy will be particularly strong.
January 16th -20th: Coldest stretch for Northeast US (on average 1980-2010)
Winter is cold. That’s especially true if you call the northern U.S. home. But January 16th-20th is usually really cold for the Northeastern U.S. That five-day stretch has averaged the lowest temperatures of the year according to an analysis by the National Oceanic and Atmospheric Administration (NOAA) from 1980-2010. That means some serious additional demand for everything from salt, snowplows, and insurance adjusters, but perhaps none greater than the additional demand for energy.
Given the combination of low temperatures and high population, the northeast uses significant energy resources during any winter blast. The region’s heating demand is typically met by natural gas, as well as large amounts of heating oil (essentially diesel), LNG, and propane. That means colder temperatures ripple throughout the U.S. energy market, across the borders into Canada and Mexico via pipeline, and across the world via additional LNG demand. The colder the temperatures, the more bullish the energy market.
While we know winter demand spikes are coming, exactly how much is always a partial mystery. Last winter (2015-2016) unusually warm temperatures helped push NYMEX natural gas prices to their lowest levels in nearly two decades. At the same time, 2014’s polar vortex sent prices skyrocketing. While it may be difficult to pinpoint exactly when to look for the next bullish blast, January 16th-January 20th is a good place to start.
January 20th: Presidential Inauguration
Sure, millions of televisions and a parade of armored limousines use plenty of energy, but that’s not what’s drawing attention at this year’s inauguration. In reality, it’s not so much the inauguration itself that will impact energy markets as much as what the moment represents. Like most presidents, Donald Trump has an aggressive agenda for his first one hundred days in office, with energy playing an important role. The Department of Energy will come under new command, climate change-related regulation will come under increased scrutiny, and the Clean Power Plan may come to an end before it every really started.
At the same time, all presidents have shown that a stated agenda and actual achieved policy are usually less than identical. Already, Donald Trump tempered some of his stated positions on climate change and environmental issues, and plenty of questions as to how a new administration will approach energy and environmental issues remain. With the inauguration in the books, energy policy will begin moving from rhetoric to regulation, and the potential impact to areas like natural gas, renewables and cleantech is immense. While Trump’s first 100 days won’t answer every energy question, they will give firm indications of presidential policy in the years ahead. Stay tuned.