Greece and the eye of the storm.
The energy sector was on a great bullish run when a not so surprising downgrade of Greece’s debt seemed to take the wind out of its sails. Moody's Investors Service cut Greece's government debt rating by four notches to Ba1, a non-investment grade, from A3. The market was not over surprised because it followed the move made by Standard & Poor's in April. Oil had been higher on good economic numbers in Europe as well as some concern about weather in the Atlantic, broke about one dollar a barrel after the news yet probably held up well as the market was focused on other issues as well. Besides the bulls are always more confident when the bulk of the trading week lies ahead of us.
The market, especially natural gas, took note of a weather disturbance in the Atlantic. At first there was a big red splotch that energy traders know is not a good thing. A red splotch means that there is a better than 50% chance that that splotch will turn into a hurricane. In fact the National Hurricane center at one point said that there was a 60% chance. Yet that was later downgraded. The latest report says, “A LOW PRESSURE SYSTEM LOCATED ABOUT 1150 MILES EAST OF THE LESSER ANTILLES HAS BECOME A LITTLE BETTER ORGANIZED DURING THE PAST SEVERAL HOURS. ENVIRONMENTAL CONDITIONS ARE EXPECTED TO REMAIN MARGINALLY FAVORABLE FOR THIS SYSTEM TO BECOME A TROPICAL DEPRESSION TODAY BEFORE UPPER-LEVEL WINDS BECOME LESS FAVORABLE ON WEDNESDAY. THERE IS A MEDIUM CHANCE...50% ...OF THIS SYSTEM BECOMING A TROPICAL CYCLONE DURING THE NEXT 48 HOURS AS IT MOVESWEST-NORTHWESTWARD TO NORTHWESTWARD AT ABOUT 15 MPH.ELSEWHERE...TROPICAL CYCLONE FORMATION IS NOT EXPECTED DURING THE NEXT 48 HOURS.”
A hurricane with all the problems down in the Gulf already could cause a major price spike. The type of hurricane of course would determine how sustainable that is. Natural gas really seems to be watching it. The Financial Times said, “ After decades in the doldrums, the period from 2001 to 2008 saw U.S. natural gas make and destroy many fortunes with its incredible volatility. The era that started with Enron screeched to a halt with a glut created by prolific shale formations and the recession. More recently, fear of price spikes have faded, particularly in the summer, which typically sees a surfeit of gas as utilities store excess for the coming winter. But the market may now have become overly complacent. The ongoing regulatory backlash to BP's Deepwater Horizon spill will have hardly any short-term impact, but a recovering economy leaves little margin for error if accidents or the weather have an impact on supply and demand. The Natural Gas Supply Association said industrial demand could be 7% higher at 17 billion cubic feet a day this summer. Utility demand could be above average as well, given predictions of a hot summer, which spurs gas-fired generation. Another wild card from Mother Nature involves potentially devastating hurricanes hitting the Gulf of Mexico. A must read in the FT.
We are still at a critical crossroads. The bulls need to follow through on this move in the next couple of days or we will sell oil try for the lows. The weather may be a key factor yet technically the inability to follow through will lead to the selling of longs.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org