Fed and geo-politics key energy drivers

The recession is over! Now don’t you feel better? Well at least for a day the stock market sure did and oil and the products decided to go along for the ride as the market once again found a reason to believe. Still it appears that the joy that we are seeing in the market place is not all about that the recession is over but a growing belief in the market place that the Federal Reserve is going to lay the ground work at today’s FOMC meeting for another round of quantitative easing. Oh sure, the expectations are not high that the Fed will do anything today but based on market action, if they do not drop any quantitative easing hints, the market will be a bit disappointed. Still the markets that seemed to be showing the most anticipation of Fed action such as gold and Treasury bonds, seem to be a bit toppy after their recent spine tingling surge as they seem to be either getting ready to sell the fact after buying the rumor or perhaps they feel that the Fed may just disappoint them.

The oil market also has to look to the Fed as it is the Fed that is keeping the market from collapsing. While the petroleum market may see a big drop in supply this week due to transitory issues such as the Enbridge pipeline outage and the double trisect of tropical storms and hurricanes the truth is that we have more than ample supply. That is being reflected in an increasingly bearish outlook by crude option players. Oil may start to worry more about geo-political issues as we move forward.

We already are seeing a dispute between Russia and Poland over natural gas contracts that may bring a repeat of a winter cutoff of supply to Europe. We have seen that be more supportive of petroleum products in past years. Dow Jones reports, “Polish gas firm PGNiG SA (PGN.WA) warned that it could be forced to cut natural gas deliveries to industrial clients in the fourth quarter amid protracted negotiations with Russia over a long-term natural gas agreement that have so far not yielded a deal, PGNiG said in a statement and news conference Monday. PGNiG expects to use up this year's quota of gas contracted from Russia's OAO Gazprom (GAZP.RS) around Oct. 20. PGNiG said gas stored in storage facilities and domestic output, as well as imports from other areas, won't be enough to meet demand. PGNiG officials called a news conference Monday amid heightened attention from European Union officials who have warned of possible shortage due to the impasse between Poland and Russia. PGNiG Chief Executive Michal Szubski said fourth quarter delivery cuts are a "worst-case scenario" which he hoped wouldn't come to pass. He said any shortage this year would not affect retail customers, but could impact industrial clients. PGNiG's decision to go public with explicit warnings about shortages comes as negotiations drag on between Poland and Russia to revise a long-term agreement signed in the 1990s to increase supplies. Polish gas firm PGNiG is also negotiating a contract with Russian energy giant OAO Gazprom (GAZP.RS) to correspond with the intergovernmental agreement. A Gazprom spokesman couldn't say how long gas supplies to Poland would last, but said: "We confirm that under the current contract, gas supplies to Poland will run out before the end of the year."

The other ongoing concern is Iran. The Financial Times reports that, “The Arab states of the Gulf have embarked on one of the largest re-armament exercises in peacetime history, ordering U.S. weapons worth some $123billion as they seek to counter Iran’s military power. A package of U.S. arms worth more than $67billion for Saudi Arabia accounts for the largest single component of this military build-up, providing a huge boost to the American defense industry”.

But will Iran back down or play more games? Dow Jones reports that Iran is ready for talks with world powers "in the near future" on its nuclear drive, foreign ministry spokesman Ramin Mehmanparast told reporters Tuesday. "Regarding the talks with 5+1, the president, Mahmoud Ahmadinejad, has given frank views, and in principle we are ready for it," he said, in reference to talks between Iran and the group composing the five permanent members of the United Nations Security Council: the United States, the U.K., France, Russia and China, plus Germany. "We hope that, with a right approach towards acknowledging the Islamic republic's rights in engaging in peaceful nuclear activities, we will have talks in the near future," Mehmanparast said.

The Fed Is Key!

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 pflynn@pfgbest.com

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.


Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.

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