Energy Market Updates

Sino-Russian Gas Deal, Ukrainian Post Election Violence, and Contracting US GDP Numbers - Oh My!

 

Russian and Chinese leadership

(image credit: Wikimedia Commons)

This week the market once again bounced around on conflicting data - likely to do with inventory numbers versus economic growth (actually a lack thereof), demand projections, Ukranian violence, and a whopper of a Nat Gas deal between Russia and China.  So much for a nice quiet 4 day week, hmm?

Internationally, Ukraine saw an explosion of fighting and casulties above and beyond what we have seen thus far in the wake of the Presidential election (which went to Petro Poroshenko, former foreign minister). Poroshenko reportedly stated he would deal with the rebel forces in "hours not months" and vowed Ukraine would refuse to aknowlege Russia's annexation of Crimea. Thursday the 29th saw helicopters shot down, killing 12 Ukrainian soldiers, and over 100 people killed in a second airport assault. Like we've talked about, bad news for Ukraine is bad news for Brent generally, and Thursday was no exception, it shot up over 35 cents on the ICE - but dropped back down today - it looks like it will settle the month out up 1.3% but down around 1% for this week. 

Russia and China signed a $400 Billion (with a B!) 30 year gas supply contract this past week as well. The Moscow newspapers claim the deal is not just about Ukraine (although they admit its a tipping point). Merryl Lynch's analysis is that the deal is a good move politically, but may not be the best business deal going. With the EU market shakier for Russia's Gazprom over Ukraine, and the EU also looking into alternate supply options/relaxing regulations, it may well prove to be a good deal in the long run business wise as well, though. The deal was also somewhat inevitable, given the Chinese demand levels and proximity. It also takes the wind out of Canada's LNG-exportation-to-Asia sails to some degree, or at least gets Russia ten steps ahead in the Asian markets. An unintended consquence for the EU though is that now they are under pressure to actually diversify supply, not just threaten to. Be careful what you wish for, right?

On our side of the pond, the news was more peaceful but not much more positive. The Bureau of Economic Analysis released its revised data on the US GDP for the first quarter of 2014. If you recall from our discussion last week, most people were not thrilled to hear the original number of GDP growth at 0.1% for Q1 - and now, the revised numbers actually show US GDP at -1.0%. Personal income and personal spending levels both barely increased at all (0.3 and 0.2%, respectively; and home sales fell 60% short of estimates. On the other hand, both the S&P 500 and the Nasdaq 100 hit all time highs. Go figure.

US Crude inventories were up again - but down again at Cushing, which should have supported (in theory) the current WTI pricing. Thursday saw prices up on the inventory news as traders zeroed in on Cushing levels, versus the overall supply increase. Distillate stocks were down and Gasoline supplies fell by 1.8 million barrels, despite expectations that we would see builds in the 200K barrel increase. This pushed gasoline up during trading yesterday, specifically on July trading, although at the close it crept down to only a 77 point gain. ULSD ended up closing down over a penny (-.0116), and both RBOB and ULSD are down today on demand expectations based on the horrendous GDP revised numbers published this week (more on that later). This number has an across the board impact because the US is the number one consumer of petroleum products, and a slow economy indicates lower demand and therefore lower prices. 

Essentially, it appears that because there are so many different factors at play domestically and abroad, they're sort of cancelling each other out (at least most days) and keeping pricing within the range we've been seeing for a while now. This will probably continue until either the US economy rebounds, the Ukrainian crisis abates, or some other wrench gets thrown into the mix. Stay tuned!

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Libya, Labor Participation, & GDP Woes Keep NYMEX Positive Despite Projected Inventory Builds

Line charts depicting the stock market scattered on a table

Analysts expect that the EIA report due out tommorow will show US Crude stocks hitting a new record high. So why isn't the market coming down?

For one, levels at Cushing (the NYMEX physical delivery point) have hit multiyear lows since the pipeline to the Gulf came online in January, which has an impact seperate from overall crude levels. WSJ cites some analysts who think Cushing could hit minimum operational levels, and thats keeping some skepticism in the market and supporting the price.

Secondly, international concerns are always a factor, and Europe is dealing with more than a few energy related headaches this week. Brent Crude is hanging in there at over $109, which is largely being blamed on the ongoing issues with Libya. Libyan production has been capped well below 2013 levels, and major oilfields remain closed down despite government promises they would be up and running by now.  Perhaps more of a dire sign for the area though -  France's major oil player in Libya, Total, has cut presence in the country down severely, and Algeria's Sonatrach has evacuuated their employees - both companies did so on security and safety concerns. Not good news for hopes that war torn Libya would be stepping back in as a major supply player anytime soon. 

Russia and Ukraine are still essentially in a standoff as well, with the usual reports of progress being made but none seeming to really materialize. 

On another note, Domestically, like we talked about before, the economic recovery picture is not looking particularly sunny. There is a lot of heated discussion about the "real" jobless numbers and the labor participation rate. At the start of the summer job season, the amount of people under 25 in the work force dropped almost half a million, and the unemployment rate for 16-19 year olds hit the second lowest number ever.  Additionally, the GDP is moving at a crawl, the Bureau of Economic Analysis estimated GDP grew 0.1% for Q1 of 2014 - not a great number in and of itself, but especially painful given that projections put it at a full 1%. Not very confidence inspiring, which tends to lend itself to higher commodities pricing (just ask a gold nut). 

 

 

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Commodities, Stocks See-Saw on Sanctions, EIA, Unemployment, and Tech


Line charts depicting the stock market scattered on a table

Wednesday's EIA report showed that the API projected Crude drops come to fruition, falling 1.78 million barrels. As we all saw this pushed up Crude & ULSD prices on the day, with ULSD closing up .0398 to 2.9275, and Crude up to 100.81, once again hanging by the new (unfortunately) benchmark of $100 we've all been hoping to drop from for quite some time now. 

Brent ticked upwards this week as well on EU discussion of stricter sanctions on Russia. Putin had announced earlier this week that Russian troops had withdrawn from the border, but no such withdrawal happened according to everyone else in the area, so more sanctions are back on the table it appears. Economic sanctions on the world's second largest energy exporter are, unsurprisingly, not great for downward price pressure. 

In contrast to Crude - US Natural Gas inventory was up 94 bcf and prices dipped slightly. That sounds like good news after the supply crunch (not to mention spiking prices) of this past winter, and it is, but bear in mind prices are likely to remain relatively high for nat gas in the foreseeable future. Why? Because even with a build of 94 bcf, supplies are close to 45% lower than they were just a year ago today and the only demand control as supply limps back up is the price level, unfortunately. 

In the broader stock market, the S&P is poised for a weekly loss, largely due to drops in energy & utility shares. The DIJA dropped 4.1 percent in 5 days over tech stock dissapointments (ahem, Twitter & Groupon), and the Nasdaq dropped almost 2% as well. Last week stocks were up for the week minus a Friday drop off, which was a little unforseen because the weekly jobs report was strong (at least on the headline level).

April's Job numbers showed unemployment dropped to 6.3%, the lowest in 5 years. However, the margin of error for revision is pretty large on these reports of late, so there may be some hesitancy in the market until the "real" numbers materialize. Additionally, the work force participation rate dropped to 62.8%, tying the all time worst record from 1978 (also October and December of 2013).

There's been a lot of contradictory indicators as of late from different segments -  real estate, manufacturing, labor participation, and Jobless claim numbers, for example, that make it difficult to get a good overall picture of the economy. As they say, the truth likely lies somewhere in the middle, but who knows where that is.   

 

 

 

 

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