An unsteady start to the year

At the bottom of a story that reports that the Ukrainian Parliament has denounced the agreement they have with Russia on natural gas supplies, Platts notes that in the Russian agreement, was a provision that will increase Russian supplies to Europe by 10% this year. This should stabilize the situation and perhaps provide some additional breathing room, providing the winter does not get any colder.

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.  

Again from Platts:  
The new Mizushima LNG terminal in western Japan equally owned by Nippon
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.
On 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
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.
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.
 The European response, apparently, was that there was no gas to spare, and thus the relief that the Russian additional supply will bring.

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.

Hmmm, I don´t think the US can derive any measure of immunity from the economic consequences of an Iranian embargo, because they do not import oil from Iran. European and Asian nations do still have enough finances to buy a significant part of the  missing oil from Iran in such a scenario, from other sources like Nigeria etc and this will increase the competition with the US for buying up this oil. There will not be 100% destruction of the demand for the oil that is currently coming from Iran in Europe, Japan, Korea and China. So the US will have to outbid these nations on the remaining oil.
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 agree with this point almost entirely. However, it is important to consider that there are more players involved than the US, the West, and Iran. Neither can they derive any immunity. An Iran oil embargo - regardless of who initiates it - will hurt most, if not all, of the world's economies.

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.

Excellent point.
An unpalatable choice...
THE world cannot afford to impose an embargo on Iranian oil exports to punish Tehran for its suspected pursuit of nuclear weapons, a leading oil market researcher says.

"The UN Security Council would be hurting the world more than it was hurting Iran if it restricted Iranian oil exports," said John Lichtblau, head of the Petroleum Industry Research Foundation, which tracks international oil markets.
There it is.
The story reports that a fraction in the Ukrainian Parliament loyal to the former Prime Minister Yulia Tymoshenko has proposed denouncment of the agreement with Russia.

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.

Might Iran flex its muscle by simply cutting production. A reduction of 50% would send world prices skyward driving the West into recession but having only a small impact on Iranian oil income.
My guess is that they are afraid that it would give a reason for all Western countries to support military actions against them. The interest of Iran is not to be seen as the source of instability and to leave US isiolated in their game to control ME oil.
See my comment above. Oil can not be targeted at the West.

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.  

You're really going to have to bid the price of oil up a lot because,  with the declining value of the USD, its not going to go far in an all-out bidding war with China.  They have about a trillion USD they are not really using right now.  Japan has more than 2 trillion.  The alternative to 85-100 USD/BBL oil is shooting up the interest rate to keep the dollar's value high and keep China and Japan interested in buying increasingly worthless US Treasury Bonds.

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???

I really can't believe that some people actually think the price of oil is rising because of the small shortfalls that occur between supply and demand from time to time. Some butterfly stirs up the air and ... bang... price rise. Since when do price-supply-demand charts have such steep slopes and tightly defined equilibrium points? Bush tells you the price of oil is rising, because you don't like to hear that the US Dollar is really a "US Peso". The price of oil is rising because the value of the US Dollar has fallen 40-50% over the last 5 years and looks like it will continue to do so. 50 billion/month, 55 billion/month, 65 billion/month, 58 billion/month outgoing every month in trade deficits? 850 billion a year? Hell, if it goes down from 65 to 59 billion, the idiot FX traders think its "Good News". But did you notice last time that reality caught up with them the next day and the Euro and Yen was back up again? How do you keep the value of the USD up with trillions in government overspending and US consumer foreign purchases? Look at the price of oil when converted to Euros/Barrel or Gold/BBL and you will see that it is more or less (or was until the last 3 months) pretty much the same as its been since the Euro was initiated. Americans... a nation of clams and ostriches! Well now I see how, "A one-eyed man gets to be king in the Land Of The Blind."
Are you sure you Gets it? While I agree that the US deficit is scary and unhealthy, a quick look at statistics shows that crude oil has increased from 11$ to 64$ since the creation of the Euro in 1999, an increase of about 500%. In the same period, $/Euro exchange rate has ranged from .85 to 1.35 but is basically right where it was 7 years ago
From sasquatch's link:

Thanks Stuart. Ill figure out the graph posting eventually..;)

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)

Straight lines don't work in making maximum financial returns. You gotta' follow the curves and buy when its low and sell when its high and make the appropriate correlations along the way. I'll bet you're bank balance is probably "pretty much the same as it was 7 years ago" too, isn't it? Now ratio by the price of gold then and now. See where linear thinking got you?

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=>

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.

Ummm... the US$ rose 15% in 2005, though that was after a 30% decline in the prior 5 years. I do expect the $ to resume declining this year though. However, I completely agree with you on the US trade and Federal deficits - they are unsustainable in the long term and I would venture that we are nearing the end of that long term within the next year or two, whereupon the $ will drop significantly.

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.

50 years and nobody's learned anything.  Embargos only hurt people.  They never "hurt" countries, they just keep the people poor and waiting to die.  Governments still build their nukes, their antiaircraft missile systems, torture their enemies and build any type of WMD they want to (or not).  Do you think that making embargos fosters peace and a good image from the world's perspective?  Besides, embargos are not an effective threat against countries that don't buy much on the world markets anyway.  But from somebody living in the US, I can see how you cannot fathom the idea that anyone can survive an embargo.  The US can't exist for more than 1.2 months without oil imports.  SPR?  Nooooo!  The Strategic Petroleum Reserve only holds enough for about 15-25 days of supply.  How long has Cuba resisted the American embargo?  50 years?  55 years?  Why not try maintaining it for another 100 years?  Do you think they will throw in the towel any time soon?  And Cuba?; they don't have any oil at all, yet they still manage to kick US butt at every opportunity just by continue to hang on and hang on and hang on.  By ratioing out Cubas "embargo resistability factor", keeping in mind that it is the size of Penn, GDP/capita $3000 to a country like Iran, the size of Alaska, GDP/cap 7700, with a #3 or so world oil producing status, world current account ranking #36 (US is #149 lowest on the list how long do you think could Iran hold out?  100 years, 200 years? 500 years?  Certainly long enough to build a nuke and push the button.  Like they have to build a nuke.  All they really gotta' do to grab the world's cajones is simply put a couple of Exocetes on a few rubber boats to control more than 1/2 of all the world's oil shippments. So tell me why they want to build nukes?  Did anyone ever think that just maybe they want to make electricity like everyone else in the world has the right to do?  Who says they don't have the right to build nukes if they want to?  Did they sign the NNT?  Why can't they be like and Pakistan and India and France, and England and China and Russia and South Africa and Israel .... Hey guys, tell you a secret, "The cat is already out of the bag!"  

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!

I'm confused. Did someone here advocate an embargo? You seem to be debating yourself.
See initial thread, Sanctions ~ ie. embargo 2nd What's the difference anyway?
Of course our embargo doesn't work. As long as Cuba is there, and we fight ineffectually against it, we have a hot-button political issue that'll keep people voting for those who make a lot of noise about how tough they're being on Cuba. Anyone who wants to remove the embargo is being soft on Cuba, and will be voted out. So the embargo stays. The politicians who favor the embargo don't want it to actually work--because they are seen to be fighting Cuba. If Cuba ever went away, people would have less reason to vote for them.


The tough thing to do about Cuba  would be to enforce an anti embargo and force Cuba to open their borders for trade and travel.
thelastsasquatch needs to start reviewing financial charts using log differences and throwing out the hi-hi(s) and lo-lo(s). Catch the waves man! The USD was way (artificially) high at that time (evidenced by the previous fall in the pre-Euro basket average) and held high by the DOTCOM scams. You know, those companies that didn't build anything and just sold adds and now worthless paper, or somehow managed to keep the scam going longer than Enron could, but still have PEs of over 200:square root (-1). The point was that the Euro was in a hopeless decline until Sadaam started changing USD for EUROS and offering to sell his oil for Euros as well. The Euro immediately turned around and really hasn't stopped much since then except for when it absolutely had to. Its just that kind of linear thinking that'll keep you guys in a tight downward spiral, in both economics and prestige ratings. Iran will start selling oil for Euros and Yen on 20 March! Just watch along the sidelines if you want to and wait to see what happens between now and then. Don't matter to me guy. I already made my 53% (0.81-1.35) Did you "Get" the part about gold? Check the other comodities. UP UP UP UP. Is the US buying it? Not before the Germans and the Japs turn them into cars and the Chinese turn the oil into kitchen plastics, pumps that break down and underware with the necks too small, but keep on buying the stuff. You're paying in ever decreasing-in-value dollars. At least until somebody cries uncle. You know that many Saudis are asking the question of their government right now, "Why are we still selling oil for US Dollars?" How long before the king gets the message? No joke man! Now think about when Sadaam got his... right after he started with that change to Euros idea. With me? Now who's going to start trading for Euros? Now who's catching the flack? North Korea is the one with the real nukes! Is somebody confussed as to which basket the glowing eggs are under? Why is not the US pulling the noose around North Korea???? You don't have to answer all the questions above, just the last one.
Well of course you're confussed. Get your head out of the sand and do <Edit> <Find in this page> "Embargo" and IE, or whatever, will take you to the first or second comment where it distinctly mentions "Embargo". Read the thread guy!