GOLD, OIL AND THE "SURPRISINGLY STRONG" DOLLAR
To this heavyweight trio for deciding investor sentiment in the commodities space, we can add sovereign debt, interest rates and currency valuations, in a cocktail mix that reads badly for oil above $85 per barrel - for Brent.
Exactly like gold, market manipulation to generate a Fool's Bounce and drag in latecomer investors to shred and shear, is heavily evident in the oil market. Now traditional, the short term bounces in commodity prices driven by the Eurozone merry-go-round of ECB rate easing, and the linked but totally irrational strengthening of the euro, are able to be promoted as "realistic" or "fact based".
Taking only the "surprising strength of the dollar" - looking at its competitors the euro and yen this isnt a surprise, to sane persons - if the USD continues to strengthen, "traditional" confidence in natural resource commodity asset price growth is set to drain and bleed away on an almost daily basis. To be sure, symbolic triggers are needed but all is ready in the domain of supply/demand fundamentals.
The main source of what we can call "conventional macroeconomic uncertainty" is the Eurozone and other EU economies, but this downplays the rational and rising uncertainty on China's "growth miracle", and its oil appetite. High levels of uncertainty concerning the US economy, and its abiloity to increase oil demand are traditional since 2007-2008. Japan's "monetary experiment" for restoring inflation, and massively raising the domestic price of oil can only be another downside pressure for global oil demand - and prices.
WILDLY BEARISH OIL NEWS
April reports from the EIA and TWIP have included what can only be called wildly bearish news. Crude supplies are at their highest level for 28 years and refinery runs at a 6-year high for this time of year. Add in the worldwide pressure, not only from central banks but also North Korea that bolster the dollar, and talking about Brent at $125 becomes fond memory of a fast-receding past. Whatever Mario Draghi of the ECB may be saying about the Eurozone economy and the near-zero rate policy of the ECB the continuing deep recession in Europe can only further depress oil demand. In 2013 the region entered its 7th straight year of declining oil demand.
The USA's accelerating growth of domestic oil production, and anemic domestic oil demand, will continue to reduce net import needs. A strengthening dollar will chip away at Obama's fond hopes of increased US exports of industrial goods and services - further depressing any potential for expanded oil demand in the US.
Once upon a time, down Memory Lane, cold weather could give a fillip to US heating oil demand and lever growth of crude prices in its wake, but natural gas usurped that role long ago. The highly exceptional long-life winter conditions ruling the northern hemisphere, especially strong in Europe but also strong in the US, have helped gas prices in several markets, but cold winter conditions have also depressed gasoline demand, while global gas production prospects, including production from stranded gas resources, and large shale gas resource potentials outside the US, make it clear that gas shortage, anywhere, can only and will only be temporary.
In Europe, its high-cost renewable energy action plans (REAPs) mandating a switch away from carbon fuels for power generating, and its now flailing and dying carbon credits market, have resulted in coal-fired generation winning out. Whether this is "clean" coal or otherwise, is not important. The knock-on to gas demand in Europe has been powerful, with declines in most EU27 countries reaching double-digit percentages in the past 12 months. Coal stays cheap, with prices still as low as $8 per barrel equivalent before shipping costs.
For US power producers, like European generators, this is a no-brainer shown by US coal-fired generation up 21 percent YOY, but policy action against coal is now strong in the US. Natural gas in the US is still struggling to beat a price level of better than $25 per barrel equivalent, triggering fast-growing moves by railroad and truck operators and builders to roll out natural gas-fuelled locos and road vehicles. This again will trim US oil demand. World shipping, still using about 2 billion barrels-a-year of oil, is also making the gas shift.
GEOPOLITICS TO THE RESCUE?
The wildcard hope and favorite of oil boomers, due to nothing in the supply/demand arena offering them succour, is a major geopolitical event. However, the North Korean nuclear issue has come and gone, and attempts to breathing media attention back into the Iran nuclear issue (via Iran's "al Qaeda" cells helping US-made terrorists with pressure cookers filled with buckshot) has proved lackluster. The boomers could hope for a reheat of traditional Israel-Palestine spats, with the return of Spring, and the Syiran civil war is always good for speculation it could somehow overflow to Lebanon, Saudi Arabia, UAE and Kuwait.
More important and a real fundamental change, global oil production is poised to move out and away from the Mid East on a steadily accelerating basis. To the increasing number of onshore and offshore oil E&P projects moving forward to commercial supply status in west and central Africa, east African projects and prospects are adding their weight. In many cases including gas resources, often large, sometimes vast, the Dark Continent is now revealing its potential promise for a global shift of oil-and-gas emphasis that will chip away at Middle East domination. This will exercise a major downward impact on the always-variable but usually large "geopolitical risk premium" on oil.
Global oil, today, provides around 32 percent of world energy compared with 53 percent at the time of the first oil shock in 1973. This longterm fundamental trend is unlikely to change in direction. To be sure, both Russia and Saudi Arabia will growl as oil prices edge their way down - but they lived with oil at $15-a-barrel in the 1990s.
By Andrew McKillop
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights
Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012
Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.
© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.
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