Global commodities markets were able to shake off political turmoil in Europe, but despite the impressive rebound, it is clear that the markets are not quite out of the woods just yet. As we have learned from the politics of the EU, just when you think things have calmed down, that is the time to worry.
The euro currency technically and fundamentally is in trouble and so too is the long commodity trade. Traders more and more will seek safe harbor in the dollar and bonds, and commodities will seek to trade in a lower range. With the new socialist French President Hollande vowing not to endorse the European Union's treaty on fiscal discipline without new growth initiatives and Greece voting on political gridlock, the outlook for Europe is in more disarray than it has been in months. Volatility should start creeping back in and the wild swings that we came to know during the Greek tragedy will come back.
For oil, the uncertainty will make global stocks of oil seem somehow a bit larger. Saudi Arabia and their production prowess is impressing the global marketplace. According to Platt’s, the International Energy Agency believes that Saudi Arabia, producing currently over 10 million barrels a day, could sustain an incredible production pace of output at just under 12 million barrels per day and could ramp up to 12.5 million barrels if need be. That belief actually adds to the global spare production capacity if the IEA figures are correct. Currently if OPEC’s numbers are correct, they are pumping about 32.3 million barrels of oil.
At the same time according to Bloomberg News, Saudi Arabia is storing as much as 80 million barrels of crude to boost supplies amid international prices that are “still a little bit high,” according to the country’s oil minister Ali al-Naimi. That means the Saudis are not quite ready to put in the production brakes just yet. Now that may be because they fear that high oil prices are hurting the long term demand prospects for Saudi oil or it is because they are trying to put additional pressure on the Iranian regime.
In the US, crude supply at Cushing, Okla. is at a record high as the oil world waits for the reversal of the Seaway pipeline! With the demand for space out weighing capacity one would think that Enbridge and Enterprise, the partners in the pipeline, could make a killing by charging a premium rate. Yet it seems that the U.S. Federal Energy Regulatory Commission denied Enterprise Product Partners LP (EPD) and Enbridge Inc.’s (ENB) request to set rates on the Seaway pipeline connecting an oil-storage hub in Oklahoma to U.S. Gulf Coast refineries. According to Bloomberg News the companies had asked federal regulators to grant a flexible rate known as a market-based tariff for the pipeline and would’ve allowed them to set and change rates without FERC’s approval. It would’ve been a first for a crude line. It seems that the demand for the 500-mile (800-kilometer) line has been so robust the companies said March 27 they’ll more than double the line’s capacity to 850,000 barrels a day. There’s no major pipeline connecting the two points, which has caused oil shipments to accumulate at Cushing, depressing prices for some grades of crude from the Bakken Shale in North Dakota and Montana and Canada’s oil sands. Yet according to Reuters Enterprise Products Partners said the decision by the Federal Energy Regulatory Commission will not delay the startup of the reversed Seaway pipeline, which is planned to occur around May 17.
Natural gas has rebounded on record power demand. Bloomberg News reports that U.S. utilities led by Southern Co. (SO) are burning a record amount of natural gas for generating electricity without triggering a forecasted boost to the fuel’s price from near 10-year lows. Power companies used 34% more gas in February than a year earlier, Energy Department data show. Even Atlanta-based Southern, historically one of the largest U.S. coal-plant operators, is on pace to consume more of the cleaner-burning fuel than coal in 2012 for the first time in its 100-year history. Utilities are the nation’s biggest gas consumers.” Still gas looks over-bought. Gas needs to take out $2.40 soon or the weight of record supply will bring the market back down to reality.