The day after a wildly bearish Energy Information Administration supply report showed that crude supplies are at the highest level for this time of year in 82 years, refinery runs are at a six-year high for this time of year showing refiners are ahead of schedule going into the summer driving season, central banks and economic data in U.S. piled on to one of the most significant sell-off events this year. First it was the bank of Japan that caused a run on the yen and a surge in the dollar by announcing an almost radical bond buying program that would double the amount of Japanese yen in circulation. The flight to the dollar was curtailed a bit by a level headed European Central Banker Mario Draghi who did not seem to get into a tit for tat with the Japanese central bank and resisted the urge to escalate the possibility of a currency war. Draghi suggested that despite recent weak economic data, the Eurozone economy would improve later this year reducing the chance for a ECB rate cut, giving the euro a boost and taking away some of the dollar panic buying.
Still the Japanese action overall was a pall hanging over the bulk of the commodities markets. The dollar and the U.S. Treasuries have regained their stature as the world's safe haven status perhaps for the first time since the early days of the financial crisis in October of 2007. This has come at the expense of the gold market, which had reclaimed its historic safe haven role during the crisis signaling that at least for now, the market believes that the United States economy is the safest in the world and the action on U.S. bonds has them acting like our debt is Triple A Rated. Don't tell that to S&P.
The downside of course is that our exports will be more expensive and we are seeing that play out in the grains and meat markets. Japan is a major importer of meats and grains and now ours are less competitive on the global market. For grain markets we have to add the worries surrounding bird flu and the fear that it could reduce Chinese demand for feed.
It could also hurt our manufacturing sector that was slowing in the last ISM report and reduce our demand for energy. So now the oil traders will look to today's jobs report to try to gauge their demand expectations.
The Energy Report has been beating the drum on natural gas and as Bloomberg News reports natural gas has been a top performer as gas gained 20% in the first quarter, the top performer on the Standard & Poor's GSCI index of 24 commodities, after showing the worst return a year earlier. Gas hasn't posted such a strong start to a year since 2008, when prices jumped 35% to $10.10 per million Btu after unusually cold weather depleted supplies
Even before the Energy Information Administration natural gas storage report, Bloomberg news wrote, "The U.S. may face the lowest natural gas supplies for the start of any heating season since 2008 this fall after cold weather drained stockpiles, sending prices up in the three months through March for the first time in five years.”
Bloomberg reasons that, "Gas for near-term delivery on the New York Mercantile Exchange climbed faster than supplies for later months, limiting the incentive to put the fuel into storage for use next winter. Buying gas based on May futures to sell in October earned 10.4 cents per million British thermal units at the end of March, down 77% from 44.3 cents for comparable contracts a year earlier, according to data compiled by Bloomberg. The narrower spread between spring and fall gas prices has reduced the incentive to store the fuel to meet demand next winter, when consumption peaks.” The spread between May and October contracts is the narrowest for this time of year since 2004. Storage companies and pipelines increase stockpiles during the warm-weather months to ensure adequate supplies to meet winter heating demand.”
This means that prices really must stay strong in the back end of the curve to assure that we have enough to meet demand. Negative news for natural gas is the possibility of power generators going back to coal.
Reuters reported that, "Rising natural gas prices forced power generators to turn to burning coal last month, with coal-fired generation 21% higher than a year earlier, energy data provider Genscape said on Thursday. U.S. producers have been churning out natural gas from horizontal wells after improving the drilling technology known as hydraulic fracturing. This has driven gas prices lower and has increasingly made the fuel more attractive to power generators. "While March electricity demand increased 2% over March last year, natural gas-fired generation plummeted 11% below March 2012 levels," Genscape said in a press release. April 2012 marked the first time that gas-fired electricity generation was as high as coal-fired generation."
Yet at the same time Reuters also reported, "Nevada power company NV Energy Inc proposed a plan to accelerate the retirement of its coal-fired generating facilities and the construction of natural gas and renewable power plants. NV Energy proposed its so-called "NVision" plan to reduce carbon and other emissions on Wednesday as an amendment to Nevada Senate Bill 123, which revises several of the state's renewable and other energy policies. This proposal by NV Energy is part of a growing trend with U.S. Western power companies to reduce greenhouse gas and other emissions by shutting coal-fired power plants. Over the next 10 years, NV Energy proposed to accelerate the retirement of its 553-megawatt (MW) Reid Gardner coal plant in southern Nevada and end its interest in the 2,250-MW Navajo coal plant in north central Arizona.
Still according Reuters, "U.S. power companies plan to shut or convert over 40,000MW 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 gas prices from record shale production depressed power prices to at least 10-year lows in several regions in 2012, 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 federal environmental rules proposed since President Barack Obama took office in 2009.There are about 318 gigawatts (GW) of coal-fired power plants in the United States, about 30% of the nation's 1,051 GW generation fleet. The share of generation fueled by coal in 2013 will rise to 39.5% from 37.4% in 2012, then ease to 39.4% in 2014, according to the U.S. Energy Information Administration's (EIA) short-term energy outlook in March. Coal produced over half of the nation's power as recently as 2003. EIA projected the share of generation fueled by gas in 2013 will average about 28.3%, down from 2012's average of 30.4% on forecasts that higher gas prices will prompt generators to burn more coal. In 2014, EIA projects gas used in power generation will slip to 27.8%.