Sitting in a weak energy commodity environment

As I predicted, Brent lost all the geopolitical premium of the Iraq crisis to trade at $110.46/bbl as Libya exports rise to new highs offsetting the Iraq concerns, and showing how well supplied the market is. WTI moves to $103.77/bbl driven by increased US production, now at 11.7 mbpd.

Fighting between the Iraqi army & ISIS continues but with few developments over the weekend – the conflict remains well away from the main Iraqi oilfields in the south of the country. At the same time, Saudi Arabia is believed to have deployed 30,000 troops to its borders with Iraq. Furthermore, Jihadists of the Islamic State took control on Thursday 3 July of the Al Omar oil field in the east of Syria.Libyan production is currently 325,000 b/d.

Libya’s NOC officials said that they were considering lifting the force majeure on the Es Sider and Ras Lanuf terminals, which has been in place since August 2013. The Es Sider terminal holds between 3.5-5.5Mbbls of oil in storage, meaning new production is not needed to resume oil loadings. Es Sider and Ras Lanuf terminals accounts for 50% of Libya’s export capacity (or 500kbpd).

Coal loses ground at $77.70/mt and is below the key support of $78/mt. Highly unlikely to see it strengthen as summer sees more exports from Australia and South Africa.  Coal weakness shows the oversupply in the market, close to 20%.

Chinese thermal coal imports fell sharply in May, down -19% month-on-month seasonally adjusted and -20% y-o-y. The fall has been driven by declining thermal power generation due to broadly flat overall demand and improved hydro and renewables generation.

CO2 at €5.55/mt… The moment that backloading buying is reduced, it collapses…. Down 6% MTD.

US gas at $4.27/mmbtu as milder weather affects slightly the supply-demand balance. However, inventories are at 666 Bcf below last year’s 2,595 Bcf and 790 Bcf below the 5-year average. Still supportive.

The EIA reported an injection of 100 Bcf, matching forecasts of a 100 Bcf. U.S. working gas in storage is now at 1,929 Bcf, 29% below the five-year average of 2,719 Bcf and 26% below last year’s level of 2,595 Bcf. Weather forecasts for the U.S. over the next six to 10 days call for above-average temperatures on the West Coast and East Coast.

UK gas lost all the premium from the Ukraine crisis and more, down at 35.40p/th (-46% YTD) as inventories rise above 4,250mcm and demand weakens…. The contango is at 26p/th.

The EU levels of gas storage are truly high at this point. UK is at 83.28%, Germany at 76.80%, Netherlands at 98.7%, Spain at 94.5%, Italy at 76.80%… Only France remains oddly low at 54.75%.  These high levels of storage explain the weak gas prices despite Ukraine and the lack of concern from countries about security of supply.

Power prices continue to fall in Europe. German power is down at€34.20/mwh (-7.1% YTD), French power at €41.55/mwh (-6.4% YTD) and Nordpool at €31.20/mwh (-2.7% YTD)

Dr. Fatih Birol, IEA’s Chief Economist just gave some of the key conclusions from IEA’s World Energy Investment Outlook which was published last week.

Main conclusions:

1)            Over $22 trillion forecasted oil and gas capex over the next 20 years. Need for investment in Middle East oil production: Dr. Birol expressed concern over the current lack of appetite to invest in new oil and gas projects across the Middle East, despite oil prices at $110/bbl. If oil prices were to fall, the level of investment from both Middle East NOCs and global IOCs would be even lower. Over the next 20 years, the IEA estimates the Middle East will account for almost a third of global new oil production.

2)            LNG prices likely to remain high: There is now more than $700bn invested in LNG infrastructure, but the cost of shipping LNG around the world remains high. Dr. Birol highlighted that the cost of transporting gas via LNG is 10x that of crude. Despite low US gas prices, the additional liquefaction and transportation costs mean gas price differentials between the US and Europe/Asia are likely to persist for some time.

3)            In Europe, wholesale electricity prices are at least 20% too low: Over the next two decades, Europe needs $2.2 trillion to replace ageing electricity infrastructure and meet carbon targets. However, these investments will not happen under current market conditions, according to Dr. Birol. He highlighted that power prices are about 20% too low to recover costs on new investments. Weak power prices are the result of lacklustre demand and heavily subsidised renewables along with cheap coal imports from the US. Dr. Birol pointed out that total investments in European renewables so far have been three times the size of total investment in US shale gas production. With some overcapacity in the European system, there is some breathing space, but 100GW of thermal capacity is needed over the next decade to safeguard reliability.


Important Disclaimer: All of Daniel Lacalle’s views expressed in this blog are strictly personal and should not be taken as buy or sell recommendations.

About Daniel Lacalle

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.