Well that week was a bit of a ride, wasn’t it? Sign of the times? A harbinger of ECONOMIC DOOM? Much ado about nothing? Blink and you miss it? A potent example that maybe summer has gone on long enough and that maybe it’s time to go back to work? I am inclined to the latter, but not blind to the circumstances giving rise to the chaos, collapse and ultimate resurrection of the market this week. That said – short post this week as we are preparing dinner for a 10 year old’s birthday. And anyone hazard a guess about who couldn’t care less about the markets? If you said – a 10 year old birthday girl, you would be correct.

So – to the point.

This week’s actions in the markets started when the Shanghai stock market went into free-fall on Monday and Tuesday, a capitulation move that many interpreted as a sure sign that the Chinese economy was heading straight off a cliff into the depths of despair. That the Chinese stock market was valued in aggregate at over 69 times earnings (vs about 20 for the U.S.) didn’t seem to be important in the rush to the exit from such speculative American companies as GE, Apple, Exxon – you know, all those smoke and mirrors companies that are so thinly traded, it’s surprising there is even a market at all! At any rate, the cratering stock markets took commodity prices over the proverbial cliff as well with oil testing prices below $40 for the first time this decade. In breathless anticipation, the media decried the U.S. Fed, likely to raise the Fed Funds Rate by 0.25% at the next meeting OMG – a whole quarter point! prepare the Chapter 11 filings!) – surely signalling the end of the super weak U.S. expansion.

A Funny Thing Happened on the Way to the Apocalypse

Then the unthinkable – a little rational thought. The Chinese government took some steps to settle the market. Market participants looked at real economy stocks and wondered what they were thinking being such massive sellers. U.S. Q2 GDP was revised upwards, consumer sentiment improved, Donald Drumpf was quiet, European economies are showing signs of strength. And the market retraced. The last two days have seen commodity prices rally by about 13% and stock markets around the world rally from the brink.

Has anything changed? Not fundamentally – but then nothing had really changed in the lead-up to the week. Is the Chinese stock market a window into economic performance? It’s hard to see how. It is a predominantly retail market that many analysts compare to a casino. Many people say that what happens on Wall Street often doesn’t reflect what is happening on Main Street. So why would the Chinese market be any different?

And what of oil? Is the price of oil whipsawing by 10% up and down on regular basis really reflective of a slow secular rebalancing of supply and demand or is it the manifestation of fear spurred on by misrepresentation and misinformation about supplies, storage, production, activity levels and thus a financial play? We aren’t out of the woods yet, but the disconnect between what is gradually happening in the physical oil market from what is reflected in the commodity pricing is quite analogous to the Chinese stock market as the predictive force for the world economy. Did anyone else catch that stat about Chinese gasoline consumption being up 17% compared to a similar period last year?

At any rate, pretty glad summer is coming to a close. And Happy Birthday to my Jaybird.

Prices as at August 28, 2015 (August 21, 2015)

• The price of oil cratered during the week before posting a big rally at the end of the week
  • Storage posted a surprise decrease
  • Production decreased marginally
  • Stock markets collapsed on speculation of Chinese economic weakness before rallying at the end of the week
  • The rig count posted a slight increase (seriously – very slight)
• Natural gas lost ground during the week on the general commodity drag and mild weather before rallying at the end

• WTI Crude: $45.28 ($40.27)
• Nymex Gas: $2.719 ($2.680)
• US/Canadian Dollar: $0.7568 ($ 0.7594)

Highlights

• As at August 21, 2015, US crude oil supplies were at 450.8 million barrels, a decrease of 5.4 million barrels from the previous week and 90.3 million barrels ahead of last year.
• The number of days oil supply in storage was 26.7, ahead of last year’s 22.0.
• Production decreased to 9.337 million barrels per day from 9.348 with lower 48 decreasing marginally and Alaska picking up the rest. Production last year at the same time was 8.554 million barrels per day.
• As of August 21, 2015, US natural gas in storage was 3,099 billion cubic feet (Bcf), which is 3% above the 5-year average and about 18% higher than last year’s level, following an implied net injection of 69 Bcf during the report week.
• Overall U.S. gas consumption decreased by 6% this week, with a 11% decrease in power plant use leading the way
• Oil rig count at August 21 was up to 675 from 674 the week prior.
• Natural gas rigs drilling in the United States was down to 202 from 211.
• As of August 24, the Canadian rig count was down to 184 (24% utilization), 117 Alberta (22%), 38 BC (45%), 25 Saskatchewan (20%), 4 Manitoba (25%)). Utilization for the same week last year was 47%.

Drillbits

• The TransMountain Pipeline expansion application oral presentation to the NEB was put on hold due to a report writer being named to the board. In order to avoid conflict of interest concerns, this individuals report will be removed from the record.
• The Alberta NDP government announced the members of the Royalty Review Panel. These include:
  • Dave Mowat – Chair
  • Peter Tertzakian, Chief Energy Economist for Arc Financial
  • Annette Trimbee, former Alberta deputy minister of finance
  • Leona Hanson, Mayor of Beaverlodge
  • The Energy industry will be highly pleased to see Mr. Tertzakian as a participant given his intimate knowledge of the Alberta and Canadian energy economy and his understanding of the global market as well
• South of the border, Donald Drumpf remains Donald Drumpf.