Oil prices rebounded after being oversold, increased geo-political risk associated with the fact that the U.S. is investigating whether or not Syria used chemical weapons against its own people and talk from the G2O that more stimulus is possible. With the G20 seemingly endorsing Japan's yen printing saying it was ok because Japans goal was all about fighting deflation and not a competitive devaluation. Now don't you feel better?
At the same time IMF Chief Christine Lagarde is saying that U.K. growth is not good and that the EU still has room for more stimuli. It seems that we have to be prepared for more global stimulus as the world growth numbers and falling commodity prices are signaling that things in the global economy are going south in a hurry and the actions in Japan may be followed by more money printing around the globe.
At the same time OPEC is showing more concern about the rapid drop in oil prices. Venezuelan Oil Minister Rafael Ramirez joined Iran calling for a special OPEC meeting to address the issue. While a call from the hawks for a meeting is not unusual, it seems that OPEC special meeting or not will more than likely reign in production unless prices rebound dramatically. Venezuela wants a floor of $100 basis Brent crude.
That may be tough. Robert Campbell of Reuters writes "Oil bulls are hoping that the current correction in Brent crude prices is nearing an end. Perhaps many weak hands have been pushed out of the oil complex by the selloff, but fundamental rot persists in places, suggesting all is not well. The selloff in Brent is not due to any one factor. A halt to the flow of Forties blend crude to South Korea, refinery turnarounds, a retreat from commodity markets by speculators and a host of other factors have been cited. No doubt all these items are in play. But the selloff in Brent was preceded by a slide in the ICE gasoil crack spread, which started early this month as demand for diesel fuel and heating oil slowed in Europe.”
Bloomberg News also highlights the challenges. Moming Zhou writes that "U.S. gasoline use fell in March to the lowest level for the month in 13 years as weaker economic growth reduced demand, the American Petroleum Institute said. Gasoline deliveries, a measure of demand, dropped 2.3% from a year ago to 8.43 million barrels a day, the API said today in a report. Total petroleum consumption rose 0.6%, driven by a jump in heating oil. U.S. non-farm payrolls climbed 88,000 in March, the smallest gain in nine months, as the jobless rate stayed above 7%, a separate U.S. Labor Department report showed. "Tepid growth and high unemployment are still burdening the economy and holding demand down,” John Felmy, the chief economist at the API, said in the report. "The recovery is a sputtering engine with a cylinder or two still not firing.” Gasoline demand in the first quarter dropped 1.7% from a year ago to 8.34 million barrels a day, the industry- funded API said. Total oil consumption rose to 18.3 million barrels a day. Demand for high sulfur distillate fuel, used as heating oil, jumped 37 percent to 395,000 barrels a day. The increase in heating oil use was "driven by the relatively colder weather in March,” the API said. Heating degree days, a measure of demand, averaged 660 in the month, up 75%, or 283, from a year ago, according to National Weather Service.
Natural Gas soared and my call for a major historic bottom in gas is looking right on. Yesterday the catalyst was the energy Information Storage report that showed a 31 billion cubic feet rise that set off a short covering rally. Yet it may be a shift in the spreads that are signaling a major shift in sentiment from this market being a cyclical bear to a cyclical bull.
Jerry Dicolo of Dow Jones wrote "Natural-gas funds often use spread trades, which are wagers on the price difference between two futures contracts. Certain bets on a widening or narrowing price gap between different gas futures contracts are often referred to as "widow makers." At some points in the year, particularly in the spring and fall, these wagers can move sharply against investors as unpredictably as changes in the weather.
“While it is unclear how specific natural-gas funds were positioned, a possible trade could involve contracts for April delivery this year and next. For such a trade to profit, gas for near-term April delivery would have to perform worse than gas slated for April 2014 delivery.
“But as a cold snap hit much of the U.S. in March, contract prices of gas for delivery in April soared 14% on the New York Mercantile Exchange. The price of April 2014 gas rose 4%.”
He goes on to say that "The trend has continued with the May contract. Contract prices for gas for May delivery rose Wednesday 1.3%, to settle at $4.214 a million British thermal units, up 19% since the beginning of March. May 2014 gas settled up 0.4% at $4.116, up 3.9% over the same period.
Long-term natural-gas prices aren't rising as much as near-term prices because producers are selling in order to lock in prices for next year above $4 a million British thermal units, traders say. That could be because they don't trust the recent climb will last, they add. One executive at a major energy trader, which arranges deals with gas producers, said that during the past month, the number of producers selling contracts for next year was the highest he had seen in two years.”
Yet what this says to me is that the market has changed. While the spread that they have been playing for the last two years works great in an oversupplied market where there is little hope of a change, the spread will not work if demand and demand expectations start outstripping projected demand increases. This spread reversal may be another sign of change in the longer term fundamentals.
We have been writing about this for most of the year. We called for a major bottom back in January as we saw signs that demand would start to rise. We called for natural gas to hit $7.00 by 2015 a call that now looks ever more likely. In today's Journal the benefits of our emerging Natural Gas economy is becoming clearer as the air we breathe. In a must read in today's Journal by Russ Gold it appear that "U.S. carbon-dioxide emissions have fallen dramatically in recent years, in large part because the country is making more electricity with natural gas instead of coal. Energy-related emissions of carbon dioxide, the greenhouse gas that is widely believed to contribute to global warming, have fallen 12% between 2005 and 2012 and are at their lowest level since 1994, according to a recent estimate by the Energy Information Administration, the statistical arm of the U.S. Energy Department. "
So with the EPA reading this and the crackdown on coal even the environmentalists will have to admit that the switch to natural gas is positive!