No Kidding! Just when you thought the Italian election was going to have a happy ending, it now looks like it’s turning into a joke. The markets thought that a lackluster turnout was going to favor the center-left coalition led by Democratic Party leader Pier Luigi Bersani. Yet a late surge by Silvio Berlusconi made possible by a comedian named Beppe Grillo, who ran on an anti-corruption campaign, has thrown the Italian election in a gridlock raising fears that it could raise their bond yields and force them to take a bailout. With Berlusconi and comedian Grillo refusing to form a coalition, we could be in for months of turmoil out of Europe, no joke! Just like the old days of last year.
The turmoil broke markets across the globe as it unmasks the fragility of the Eurozone countries and the thin line between success and failure. Uncertainty breeds more uncertainty and the global markets reflect that. Crude oil forgot about record oil demand in China and instead focused on the deflationary effects of gridlock in Italy, bringing down confidence of the recently bailed out Eurozone countries.
The reverse in the euro caused a reversal in oil and to be honest, it was due for a sell off. The technical picture is playing out as we expected with the bottom in December to the top near $97 and now a target of $91 and probably $88. That $88.00 may happen if the world believes that Italy can’t get its act together.
Of course, this makes Ben Bernanke’s testimony today all the more interesting. It will be hard for the Fed Chair to talk exit strategy when a faltering Europe actually could force us to be more accommodative.
Natural gas popped on more cold but it is still the long-term story on the gas market that is gathering more attention. With margins and volatility on the low end it may be time to make a big commitment. Demand for gas is hitting record highs as it appears low prices will cure low prices. As we have discussed, it appears that natural gas fundamentals are getting more bullish as we have covered in previous reports. One big factor in demand increases is the EPA and their crackdown on coal.
Reuter’s News reported that U.S. power company American Electric Power Co Inc will stop burning coal at three Midwest power plants by 2015 as part of a settlement announced with federal regulators, eight states and several environmental groups. In a statement on Monday, the environmental groups said the Ohio-based company, long known as the biggest coal generator in the country, would retire a total of 2,011 megawatts of coal-fired capacity at plants in Indiana, Ohio and Kentucky. The environmental groups, including the Sierra Club and Natural Resources Defense Council, said AEP would stop burning coal at the 580-MW Tanners Creek 4 unit in Indiana, the 615-MW Muskingum River 5 unit in Ohio and the 816-MW Big Sandy 2 unit in Kentucky. AEP said in a statement that it agreed to install pollution control equipment on the two 1,300-MW coal-fired units at Rockport, another power plant in Indiana, as well as refueling or retiring the Tanners Creek 4 unit. In the past, AEP said it was thinking about retiring Big Sandy 2 by 2015, refueling Muskingum River 5 with natural gas by 2017 and refueling Tanners Creek 4 at some point.
Overall, Reuters reported power companies have announced plans to shut or convert about 40,000 MW of smaller, older coal-fired plants over the next few years as cheap natural gas prices and strict environmental rules have made coal the more expensive option in some areas. Eventually, the switch away from coal may shut 60,000 MW to 100,000 MW of power generation across the country, according to industry estimates. Low natural gas prices have depressed power prices to at least 10-year lows in several regions, making it uneconomic for generators to install new environmental controls on their oldest and smallest coal plants. Those controls are needed to keep the units compliant with the latest flurry of federal and state environmental rules. There are about 316 gigawatts of coal-fired power plants in the United States — about 30% of the nation's 1,039-GW generation fleet.
Last week Reuters reported, "A free trade agreement between the United States and Europe could open new markets for domestic natural gas, but without access to big growth Asian markets there still may not be enough demand to launch the export revolution that the industry desires. Obama, in his State of the Union speech, said the United States wants to foster closer trade relations with Europe, sparking speculation that an FTA could create an easy path to shipping liquefied natural gas (LNG) to the continent. Morgan Stanley energy analysts this week said an FTA could quicken the timeline for LNG projects targeting Europe and even increase volumes heading there. But other experts say few, if any, of the more than a dozen planned U.S. projects will go ahead before they receive approval to export gas to major buyers in Asia such as China and India, which do not have FTAs with the United States.
“Global LNG operators need access to 100% of the markets. Restricting the trade would reduce the value of the U.S. supply," said Lafayette Herring, an LNG analyst at Waterborne Energy consultants in Houston.
U.S. LNG exports are tightly restricted and projects must be approved by Washington. Deals to ship to FTA countries are typically rubber-stamped; only one project has been approved to export to a non-FTA country, amid concerns about driving domestic prices too high. FTA nations that import LNG represent 20% of global demand, according to Waterborne, most of which is made up by the world's No. 2 LNG importer, South Korea. Adding Europe to that list would bring it up to 50%. Financing of export projects, which cost billions of dollars to build, hangs on companies securing supply deals. Such deals are far more likely if all the world's importers can be approached. Without deals, it becomes very difficult to convince investors that the project will make money. At stake is the fate of proposed projects run by Royal Dutch Shell, Exxon Mobil, Sempra Energy and other smaller ventures. Some experts said that projects hoping to export from the United States will already be under construction by the time any trade deal with Europe is formalized.
