Coal reaches for record U.S. exports, oil inventories surge

Nothing Bearish About It

Coal ship Coal ship

If you were trying to find anything of note in the Federal Reserve Open Market Committee statement, well forget about it. The Federal Reserve showed little signs of decision and it is all steam ahead with unlimited easing. While the market is still fretting about Europe and China, it is clear that the Fed will still have their back. Even concerns that Japan’s spat with China over some islands could add to further slowing in the region seems to have been offset somewhat by the markets expectation that Japan is getting ready to act and pump more yen into their sagging economy. Plus in the UK, they got an Olympic sized bounce out of negative growth inspired in part by the Queen sailing into the Olympic village in a parachute. I am sure that helped alcohol sales as well.

The Fed did not disappoint. The voting Fed members stuck by what increasingly looks like their lame-duck chairman not wanting to upset the apple cart ahead of what could be a lousy jobs report and oh yeah, this small event, the election, coming up. Traders are increasingly pricing in the possibility of a Romney victory and what that may mean as far as the future of fiscal policy going forward.  The Fed says they will keep QE3D rolling by vowing to purchase additional agency mortgage-backed securities at a pace of $40 billion per month. The committee also will continue to twist and shout through the end of the year in its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities. These actions together will increase the committee’s holdings of longer-term securities by about $85 billion each month through the end of the year and should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Fed and the news out of the UK and Japan was even enough to reverse the fortunes of the massively oversupplied WTI marketplace. The Energy Information Administration reported that commercial crude oil inventories surged by a whopping 5.9 million barrels, putting supplies well above the normal range for this or any other year. The gasoline supply increase was not shabby either, rising by 1.4 million barrels, still below average but showing signs of progress. Of course it came perhaps at the expense of distillate which fell 600,000 barrels!

Our abundance of crude oil supply is in part thanks to the shale revolution, which not only impacts natural gas but also other energy sources. On top of that it also makes older wells for oil more productive using new technologies. It is also impacting our demand for coal and our ultimate destination for coal. At the same time it has been helping our trade balance!

The Energy Information Agency Reported in their “This Week In Energy” that” U.S. 2012 coal exports, supported by rising steam coal exports, are expected to break their previous record level of almost 113 million tons, set in 1981. Exports for the first half of 2012 reached almost 67 million tons, surpassing most annual export volumes dating back to 1949. U.S. coal exports averaged 56 million tons per year in the decade preceding 2011. If exports continue at their current pace, the United States will export 133 million tons this year, although EIA forecasts exports of 125 million tons. Total U.S. coal exports, including both steam and metallurgical (met) coal, were almost 13 million tons in June 2012, surpassing April's record-setting amount by 0.2 million tons. June was also the third consecutive month of exports surpassing 12 million tons.

The global economy has been slowing, especially in China, the world's largest coal consumer by a large margin. As a result, EIA does not expect coal exports to continue at their current pace. Exports in August, the latest data available, reflect some of the weakening global demand for coal, falling 2 million tons from the record June levels. While declines in export levels inject some uncertainty, exports remain elevated with lower August exports still 13% above August 2011 levels. As a result, 2012 is still expected to surpass the 1981 record. This increase in exports marks a significant reversal from the general downward trajectory of U.S. coal exports beginning in the early 1990s, which bottomed out in 2002 just under 40 million tons, the lowest level since 1961. Coal exports in 2011 rose 171% from 2002, with only a brief interruption by the global recession. Export growth accelerated after the recession, with consecutive post-2009 growth of more than 20 million tons per year, a level of growth not seen since the 1979-to-1981 export boom. Current data for 2012 (through August) show coal exports are growing even faster and should more than double 2009 export levels, buoyed by growth in U.S. steam coal. Increases in steam coal exports come after years of losing ground to met coal exports.

While met coal has typically held a larger market share of U.S. exports than steam (its share remained relatively close to 55% over a prolonged period), between 2009 and 2011 met coal averaged two-thirds of U.S. coal exports. However, current data (through August 2012) show that steam coal exports are rebounding, growing about 50% in 2011 and on track to grow another 50% in 2012. In a near mirror image of 2010, steam exports are now driving U.S. coal export growth, accounting for 95% of the annualized 2012 export increase—pushing coal exports to likely reach their highest level on record this year.

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.

 

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