Ghouls, Guy Fawkes and Greek debt

The past couple of weeks have been full of fireworks both in and out of the Energy markets. With the recent Halloween and Bonfire night festivities, I got to thinking about the similarities between Guy Fawkes and his plan to dethrone King James I and the current state of unrest in Greece with George Papandreou. Both Greece and Guy Fawkes (and his accomplices) spared no animosity towards their leaders, which led to change in their retrospective countries. Guy Fawkes wanted King James I killed (a tad harsh) so Catholic monarchy could be restored, whilst Greek citizens have lost faith in their Prime Minister, George Papandreou and his government.

Both Guy and George have created major waves; Guy Fawkes is infamous and had a national event made out of his actions, Bonfire night. George’s actions and the handling of the Greek debt have also caused ripples, throughout the EU and beyond as Greece’s problems have highlighted the problems existing in other EU countries, such as the mounting debt burden in Italy where sovereign debt yield values have now exceeded the critical 7% yield threshold which most likely leads to bonds to be reclassified as Junk bonds. The 7% level was seen as the point of no return earlier in the crisis for Greece, Ireland and Portugal, forcing those countries to seek aid from euro-zone partners and the International Monetary Fund.

On the back of the spot light on Greece’s $410 billion debt, the oil markets have seen a downward trend in the recent weeks at the risk of a double dip recession. Although OPEC (Organization of the Petroleum Exporting Countries) have raised its demand forecast by 1.9 million barrels a day until 2015, the economic recovery remains ‘very fragile’ and there is still a likely chance of another recession, therefore potential for much reduced demand for oil.

The downward trend in the power markets has sped up since the conclusion of the October renewals. Unseasonably warm temperatures (no, it isn’t hot enough for shorts and tee-shirts!) have reduced short term demand, whilst breezier weather has kept wind turbines working on overtime, bolstering supply through higher wind powered generation.

Gas prices have also given up the uphill slog and decided to make their way down the slope climbed in the past few months. The uncertainty over Greece and Italy’s futures and the impact the debt is having on the rest of the EU and the knock on effect for the rest of the worldwide economy has caused prices on the whole to decrease (if you ignore the occasional spike in oil due to improvements in Libya). An improved LNG outlook, with several scheduled additional arrivals expected this month added to an ease in prompt and near curve gas prices.

Fracking Nora! Years worth of shale gas found right 'ere in Lancashire

Caudrilla Resources who have been using a site in a small Lancashire village for testing purposes announced on the 21^st September that it had discovered 200 trillion (yes trillion!!) cubic feet of gas beneath the ground in Lancashire’s Bowland basin. This amount of shale gas could provide enough gas to meet the entire UK demand for 66 years (although it is debatable how much of this can actually be recovered, with the final amount recoverable likely to be around 10-20%).

So what is Fracking, how does it work and why does it have such an awesome name?

Fracking is short hand for hydraulic fracturing and refers to how the rock is fractured apart by a high pressure mixture of water sand and chemicals. Experts also like to refer to a ‘frac job' (oo er!) and a ‘frac unit’.

It is a process in which giant drills are used to dig deep into the earth whilst creating tiny explosions to shatter shale rocks, releasing the gas inside. The ‘mixture’ is injected into the rock at very high pressure which causes the gas to flow out to the head of a man made well.

Fracking does have a few enemies and as with most things to do with any ‘non green’ energy is thought of as controversial. Much of the water used in the process is collected and then filtered and cleaned. There are concerns that potentially carcinogenic chemicals can sometimes escape and end up in drinking water. However the industry itself vigorously denies these claims. The other hot topic you will see people protesting about is climate change and global warming, although shale gas emissions from natural gas are much lower than those from coal and oil. 

There are major advantage to this Shale gas discovery, it will boost overall worldwide gas supplies and could help to reduce the overall market cost (yey!) as well as a present a potential £6 billion boost to the UK economy.

Maintenance on Qatargas infastructure causes spike in UK energy prices

So, the past fortnight’s energy prices plotted on a graph look like the south side of Mount Everest. October 11 power prices have risen by around 6% in the past two weeks whilst Brent Crude oil reached a four week high, despite weak economic data. So the sudden upturn in prices we hear you ask?

Last Friday, Qatargas, the world’s largest LNG export terminal decided to shake things up by announcing that they would be carrying out maintenance on 3 of their 5 production trains between now and November. This could potentially mean that LNG deliveries to the UK are stunted in the short term future. The news has coincided with colder than seasonal norm forecasts for the start of winter.

Qatar gas claims the news is in anticipation of a downturn in the global economy, meaning less demand. However, it is likely that they were playing a tactical game, keeping the news quiet until the last minute. Prices had been moving lower until Qatargas’s news so it is possible it had been strategically kept hush hush until now so that panic ensued and the price for LNG rocketed. Yey for Qatargas and their profits, boo for UK energy markets!

It is possible that the market has over reacted to the maintenance on Qatargas’s infrastructure and the spike in prices shouldn’t be maintained due to other bearish factors, i.e. weak economic data...

·         US employment figures are down

·         European and US consumer confidence levels have dipped

·         The Canadian economy has shown no growth for the first time since the recession in 2009.

All these indicators should signify a dip in prices if stock market values lower and industrial energy demand ends up taking a hit.

Uncertainty in global equity markets causes lack of direction in energy markets.

Uncertainty in global equity markets causes lack of direction in energy markets.

In the past fortnight global financial markets have been in disarray over US debt and the big ‘will they, wont they’ question over raising the debt ceiling. After months of discussions and political arguments amongst the Republican and Democratic leaders they are expected to vote this week on whether to raise the US borrowing limit and avert default payments.

So what have the effects been on oil?

·       Oil has seen rises of nearly 3%, the largest recorded gain in three months. This is to a certain extent due to increased investor interest as bets are being placed that should the agreement be passed it will boost economic growth and provide upward pressure on energy demand and prices. Investors are pulling out of equity markets and piling head first into commodities, mainly oil and gold.

·       As oil prices surged on potential profit taking, the future of oil demand remains cloudy. US jobless data released shows high levels of unemployment and factory outputs have slowed down to a snail’s pace as industrial reports show the weakest rates of growth since the industrial powers struggled back in 2009 during the recession.  Eurozone manufacturing PMI data also drifted to below 50 in July, its worst since September 2009.

·       The price of gold has slid by at least $15 an ounce.  With gold traditionally being a refuge for traders and investors concerned about the state of the economy, this could spell out easing on economic tensions.

And in other news...

·        We went back to the 1940s this week when it was reported that BP have had to close the Forties Pipeline system to remove an unexploded mine from World War II.

·        A tropical storm, Don, meant that Shell Oil had to halt oil output. This resulted in a total of 530,337 barrels of oil output being lost over five days. Operations were restarted on Sunday after it was confirmed there was no storm damage and production is slowly ramping back up. There is a high probability that another tropical wave will develop into a storm or hurricane (called Emily!) in the next few days which will be another blow for oil production numbers. The Gulf currently accounts for around 30% of oil and 12% of gas production in the US.

·        The UK gas system has a healthy supply outlook over the coming weeks, an abundance of LNG cargos are anticipated to arrive and temperatures are forecast to be above seasonal norm (dust off your shorts and flip flops!).  

·        Rough Storage is feeling rather bloated so to speak. Currently Rough gas storage levels have reached 3550 mcm, record highs for this time of year.

July 2011

The roller coaster ride that is the energy markets – hold on tight (and watch out for the jellyfish)...

•    June has been a month of spectacular dips and rises, leaving us pondering over what will happen next.  Oil has been the main driver on gas and power prices - early on in the month we saw falls across the board with weak oil due to poor US economic data. Gas and power prices soon started to firm once the main European bank holidays were over and continental exports resumed, resulting in tighter supply margins.

•    Brent Crude oil soon began to creep back up on OPEC delaying their decision over a ramp up in production levels. It was eventually decided not to push up levels and they were left unchanged. Easing the decision was an announcement from Saudi Arabia that they are ramping up production from 8.8 million barrels to 10 million over the next month.

•    The bears then regained control of the oil market and prices fell. Bullish EIA reports due to weak US manufacturing data alongside Greek sovereign debt and its threat to the Eurozone economy put downward pressure on oil prices.

•    The €12 billion loan package to Greece from the Euro Zone was then delayed until strict austerity measures could be agreed, causing a dip in the Euro.

•    Carbon prices took a stomach flipping dive when Reuters reported that EIA have forecasted an oversupplied market for the next three years. This had a knock on effect on power prices, forcing them into a downward trend.

•    Oil reversed the earlier gains when the EIA crude oil stock report showed stronger than expected withdrawals in crude and gasoline stocks.

•    The upturn in oil prices was soon reversed and prices dropped by as much as $5 a barrel as the Dollar strengthened and the IEA announced plans to release 60 million barrels of crude oil over the next month from strategic stock piles in an attempt to boost the world economy and lower prices.

•    The fight between the bears and bulls continued as the bulls steamed ahead once again and took control as China expressed an interest in buying the Greek debt (it is in their interest to have a stable Euro).

•    Oil continued to creep higher when the Greek austerity vote was passed on the 29th June.

In other not totally unrelated news, high volumes of jellyfish forced staff at the Torness power plant in Scotland to close the plant down for two days after swarms of jellyfish swam into the seawater filters. Now that’s not something you read about everyday!

June 2011

The recent bearish run was halted as prices spiked in anticipation of Germany’s decision to axe all nuclear generation, Europe’s largest energy consuming nation (Gulp!). Nuclear power in Germany equates to around 25% of their energy fuel mix, so what does this mean for the UK and the future of prices?

The German chancellor Angela Merkel has decided to decommission all the countries nuclear power stations by 2022, starting with the 7 oldest reactors this year. Alongside the end of German nuclear power Angela Merkel has stated that the country will be cutting emissions by 80% by 2050 and will rely heavily on ‘green’ energy, which at present can be highly unreliable and could potentially mean higher exports from the UK and other sources to aid Germany’s lack of generation and potential black outs. Another debate surrounding Germany’s decision is the massive hike in green house emissions (approximately an additional 40 million metric tons) they will likely end up releasing into the atmosphere by inevitably needing to build more gas fired power stations. This will cause a few eyebrows to be raised after last year’s global emissions rose by 5% on 2008 and set a new record level (not really the direction the Kyoto Protocol wanted to go!)

Coal prices have also hiked up in the past few days on the back of Germany’s news as this year and through to the next Germany will be relying heavily on coal generation power.

Electricity and Gas month ahead prices

                                      

May 2011

The bears have tightened their grip over the sliding gas and power prices, with May seeing a continuation of April’s trend.

·         Gas has avoided any significant changes, seeing a week on week loss of only 0.83%, it seemed as though it decided it deserved a holiday (like the rest of us) and stayed pretty flat.

·         We have been lucky to have had plenty of sunshine and long bank holiday weekends this month, (Thanks Will and Kate!) all factors which have aided in bearish market prices due to lower industrial demand and warmer temperatures.

·         The UK has seen an influx of LNG cargo’s, which have more than offset the shortfall in Norwegian flows resulting from supply niggles at the Kollsnes plant due to maintenance and the Langeled pipeline struggling to reach 20 mcm for the majority of the last fortnight.

·         A heavy sell off in Crude oil and a 31% sell off in silver last week increased volatility in the commodity markets and triggered a downturn in gas and power prices.

·         Oil prices have been extremely volatile (producing graphs that don’t look dissimilar to the Himalaya mountain range) but have ultimately traded sideways. This has been on numerous factors

o   Many market participants are erring toward a downturn in prices as US demand looks weak.

o   Eurozone debt remains a major concern. A slowdown in economic recovery has pulled both oil and stock prices lower. This comes as the Eurozone minister approves a 78 billion euro bailout for Portugal.

Electricity and Gas month ahead prices

April Update

UK gas and power markets have been volatile over the past month, we saw a steep climb in prices followed by significant downward movement, perhaps due in large to some of the following bearish fundamentals;

·         The latest sizeable aftershock in Japan had little effect on markets, UK LNG deliveries were originally thought to be impacted by Qatar’s promise to send out an additional 60 LNG cargoes to Japan. However UK supplies have remained healthy and well supplied, with a minimum of 5 cargoes due to dock in the UK between the 19^th and 25^th of April.

·         UK supply levels are more than two and a half times the levels seen in 2010. Increased LNG deliveries and strong gas flows have enabled high storage injections and resulted in a comfortable system.

·         Scorching hot weather (for the UK anyway) has resulted in lower demand and increased ice cream sales. Combined with healthy flows the lower demand has ensured the gas system has been more or less consistently long despite high storage injections and Interconnector exports.

·         Brent Crude oil reversed some of its gains after touching a two year record. Increased stock piles and refinery maintenance in Europe coming to an end combined with concerns over weak economic recovery have put downward pressure on prices.

...and adding a floor to the falling prices

·         Uncertainty over the escalating turmoil in the Far East and North Africa leaves many traders and market participants feeling uneasy over what direction the market may take. If the political unrest spreads, large oil exporting nations could become affected which in turn would affect oil exports to the rest of the world.

Gas and Electricity Month-ahead prices

UK gas and electricity markets

It’s been a hectic fortnight for the UK gas and electricity markets. Global drivers are setting the standards for the rising prices as the unrest in Libya continues and the earthquake and tsunami in Japan have rocked economic sentiment. Japan is the world’s third largest electricity consumer; it has 54 nuclear reactors which supply 30% of the countries entire generation needs. Japan is now almost entirely dependent on LNG to meet demand and has over 40 terminals across the country. Qatargas has confirmed that they will provide all the LNG needed to meet Japanese requirements, which could potentially be the majority of spot cargos.

The political rows in Libya caused oil prices to rocket to 29 month highs following fears that oil supply from the Middle East could be cut off to Western Europe. Oil has recently retreated from its recent highs. This coincides with expectations that demand from Japan, the world’s third largest economy, is to drop for a substantial amount of time. The downward pressure from reduced demand has been alleviated by unrest in Bahrain as anti government demonstrations took place. However the concern over Saudi Arabia’s day of rage fell flat as activists were deterred over fears that Islamic radicals would take over the protests.

Coal has firmed significantly, currently at around $128 a tonne for April. This is due to the German chancellor Angela Merkel announcing that Germany will be closing all pre 1980 built nuclear power stations for three months pending health and safety assessments. This will leave a large gap of 7.4 GW in German generation which will have to be filled by coal plant generation