An unsteady start to the year
Posted by Heading Out on January 16, 2006 - 12:28pm
So far temperatures have been milder than anticipated, reducing demand both in Europe and the United States. Given that Norwegian gas exports were up 8% last year, the combination of increased supply and reduced demand will, no doubt, have an impact on gas prices in Europe. In the US this balance will, more likely, depend on the continued warmer weather to keep demand down, although (as pointed out a bit earlier) the switch away from gas by industry has already more than offset the decline in production from the shut-ins of the GOMEX.
Since the US does not have pipelines to Russia, we are going to have to rely more on LNG transportation. So far this has not had a significant impact on US supply, and yet, internationally, its value is growing.
The new Mizushima LNG terminal in western Japan equally owned by NipponOn the other hand it does not appear that the Ukrainians are the only folk that can play politics with pipelines. The UK saw this last November
Oil Corp and Chugoku Electric Power received its first import cargo Monday
from Australia, a Nippon Oil spokesman told Platts.
The 57,000mt test cargo would be consumed by Chugoku Electric at its
power plant in the vicinity, the spokesman said. The Mizushima LNG terminal,
located at the site of Nippon Oil's Mizushima refinery, would start commercial
operations in April, he added.
The second LNG cargo for the Mizushima terminal is scheduled for arrival
in the second half of May, the spokesman said.
In late November UK gas prices spiked as high as 170p/th, five times the October average, as low imports of gas through the Belgium to UK Interconnector pipeline forced UK gas companies to meet demand with expensive gas supplies from storage instead. The pipeline never got more than two thirds full, and remained below even the 42-mil cu m/day forecast made by National Grid before the winter began, let alone the pipe's full 48-mil cu m/day capacity.The European response, apparently, was that there was no gas to spare, and thus the relief that the Russian additional supply will bring.
Ofgem is concerned that continental companies were holding back gas they could easily have supplied to the UK. Ofgem boss John Mogg wrote to the EC in November asking them to investigate whether continental companies were holding back their gas, or whether they genuinely had no spare gas.
In regard to oil, the fragility of the supply:demand balance is suggested by the sensitivity of prices to events in Nigeria and Iran. Currently the output from Nigeria is down over 100,000 bd due to delays in repairing a pipeline. However the threat to "totally destroy the capacity of the Nigerian government to export oil" has led Shell to withdraw personnel. This, apparently, does not affect the Deepwater operations and only 10% of the oil output that Shell gets from Nigeria.
Iran, on the other hand, is causing concern on two fronts. Firstly there is the debate over the start-up of nuclear operations, with the possibility of sanctions from the West. This may be an unpalatable choice, given the tightness of supply. However, given that Iranian oil mainly goes to Asia and Europe, may make it easier for the US to take a stronger stand.
However Iran is also talking about having OPEC reduce production of oil based on a projected supply surplus in the 2nd Quarter of this year. Whether that is meant just to emphasize the threat they are making to protect their current position, or whether they really believe that the world will see that much difference is unclear. The IEA are predicting a growth in non-OPEC supply of 1.4 mbd and that OPEC will increase their other liquid supply by 0.4 mbd, and this is seen as a threat to the current oil prices. Given, however, that there was more than enough oil, at the price that prevailed last year, so that production only increased 900,000 bd against the projected 1.4 mbd projected, we may be seeing that demand destruction will curtail the need for this production which, if sustained, will cause, on its own, a drop in price.
However as we keep discussing here, the reliability of the IEA in predicting production, given the potential supply disruptions already visible, is sufficiently weak that optimism is hard to sustain. But I have been wrong before.
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Any discussion of an Iranian embargo should deal with the fact that such an embargo is not a useful "punishment" of Iran as it punishes the enacters of the embargo at least as much. Instead, it might be more useful to discuss it as preempting the use of the Iranian oil weapon. If the West demonstrates a willingness to absorb the consequences of such an embargo, this is a way of demonstrating to Iran that the conflict is very much "for real" without using military force, with all the possible out of control scenarions resulting from it, right away.
I do maintain that the US is in a better position than Asian exporters including China, Korea, Thailand, and the Philippines. My point is not that the US is right or would come out of this in good shape. It is that the oil weapon is blunt and doesn't always hit who it is aimed at - again this applies whoever initiates a stoppage of oil exports.
Otherwise it would have been a major hit and we'd have already seen a full-blown gas war happening again. My experience from politics in Eastern European countries is that such wild steps are often taken by the opposition in order to gain some points from the electorate. But it ain't likely to happen.
Even a partial embargo would hurt Asian exporters and poor African countries before it hurt the US.
Given the US strategic reserve and domestic oil, the US could limp forward long after other countries, say South Korea (and I think China) had crashed and burned.
In the meantime, over 50 billion USD per month (23 billion a month just for oil) is leaving the US in foreign trade deficits and the US government is spending much more than it recovers in taxes. Interest on foreign owed debt is now about 1800/year when distributed out to the average American family (that's only interest, no repayment of borrowed capital which is approaching that of Argentina before the Argentine Peso collapse) and Iran will start selling oil for Euros and maybe Yen, vastly decreasing the world's need for US Dollars (or is it "American Pesos", read "The Economist") to buy oil, so don't look to start selling more and more US Treasury notes to keep going on with that farce. The stuff is going to hit the fan one of these days. Since Iran will open its oil trading bourse on 20 March 2006, look for it (or some kind of wildly unexpected compensating event, or diversion of attention ie. perhaps another "Bush fabricated disaster" or a new thrust on, "The War Against Terror", to happen real soon. Wonder what its going to be???
So, of note, is that in the past 12 months since the Euro peaked on 12/28/2004 (oil closed at $41.7 on that day and $64.3 Friday), oil has increased 54.20% in dollars but increased 73.03% in Euros. (1.54*1.3633/1.215)
I have long since abandoned the strategy of buying low and selling high - I learned years ago to buy high and sell higher, and in fact when I ran my hedge fund that was precisely the core strategy. The market undervalues 3-5 standard deviation events so going with the trend, long or short, and pyramiding makes one alot of money ($ or your precious Euros).
Gold has gone up from $300 to $565 (up$8 tonight) in the past 7 years -roughly up 80%. <img=http://www.kitco.com/LFgif/au00-04.gif>
Oil over the same period is up 500%. Energy is what makes the world work. Without energy we have nothing. As long as the economic system is intact, which I expect for sometime, oil will continue to go up more than gold. Only when currencies are worthless will gold have any actual true value, as a barter mechanism. Until that time, I will hold a small % of my assets in Krugerands and Maple Leafs as insurance against that type of world but mostly be invested in oil, gas, alternative energy, etc.
Lest this become a 'whose currency is longest thread' that will annoy TOD readers, I will defer to your trading wisdom and desist.
The $ price of oil has been remarkably insensitive to $ forex fluctuations these last 3 years or so, increasing at a bit over 30% in $ terms each year. Might get frightening if that association breaks in response to a $ crisis.
Now we talk US Embargo? So says another totally brilliant wannabe American foreign policy maker. OMG I'm sure Condi must have a better idea than that, although I'll only give you 1:1 odds.
Ostriches! Heads... UP!
Chris