Energy outlook clouded by political risks

Political Risks

Forget all those worries about war and the rumors of war — that was yesterday’s news.  After the UN passed a resolution on Syria’s chemical weapons and the President of The United States spoke to the President of Iran on the phone today, the risk is all political — the showdown in Washington, showdown in Italy and, oh yes, lousy Chinese data. Oil (NYMEX:CLX13) looks heavy and so do the products, and the market can only hope for an oversold bounce or some political sanity. Good Luck!  

Last week the entire energy complex was giving into the weight of the calendar as well as political realities. The complex has fallen for three weeks in a row and is near 12-week lows. There is still deep division over Obamacare, and in Italy it seems that Berlusconi willingness to allow the country to descend into turmoil is raising concerns about the outlook for demand. Now add to that the HSBC Purchasing Managers' Index (PMI) came in at 50.2 missing the flash estimate of 51.2. Not the type of number that gets you thinking strong energy demand.

On top of that we have seen a rebound in Libyan oil exports, not to mention Nigeria and the South Sudan. That is on top of super Saudi oil production. The Saudi had been producing more than 10 million barrels a day, which has been the highest level since the 1980s.

Natural gas (NYMEX:NGV13) bulls have backed off bullish bets yet the long term story on natural gas is still very exciting. The Wall Street Journal reports “U.S. energy companies are turning to Mexico as they struggle to find uses for the glut of natural gas that has depressed domestic prices for the fuel.” Pipelines are carrying twice as much natural gas to Mexico as they did in 2010, according to federal data, helping to push U.S. gas exports to the highest level since the Energy Information Administration began tracking them in 1973.

The U.S. still imports more gas than it exports, and its shipments to Mexico account for a little less than 3% of U.S. production. But rising exports to Mexico are bringing the U.S. closer to becoming a net exporter of natural gas, and could provide a meaningful boost to domestic gas prices, some analysts say. "To some extent it is functioning as a relief valve," Ed Kelly, a managing director at consulting firm IHS CERA, said of Mexico's impact on U.S. gas supplies.

Biliana Pehlivanova, an analyst at Barclays, projects that U.S. gas exports to Mexico will double by 2017 as new pipelines cross the southern border. That, she estimates, could add 25 cents to the price of a million British thermal units of gas, which currently trades at about $3.50 a million BTUs. U.S. gas shipments are a boon to Mexico, which faces a shortage of the fuel amid booming industrial demand and its own dwindling output from conventional gas fields. Despite Mexico's vast untapped deposits of gas in shale-rock formations, it likely would take years for the country to unlock those reserves.  In the meantime, importing U.S. gas by pipeline is far cheaper for Mexico than burning oil or buying ocean-borne cargoes of liquefied natural gas. Companies on both sides of the U.S.-Mexico border are investing to meet this demand.

The Journal also reported that “Royal Dutch Shell PLC (RDSA) will sell its stake in the Eagle Ford Shale in South Texas in the wake of the $2 billion write-down of North American assets,” the company announced in August. The sale of leases on 106,000 acres in the oil-and-gas-rich region, which the Company confirmed to The Wall Street Journal Sunday, illustrates the struggles major oil companies have had making profits in places where smaller energy firms have thrived.

Shell said the Eagle Ford holdings don't meet the company's targets for size and profitability. The Eagle Ford stake "offers a valuable growth opportunity for another experienced operator," said spokeswoman Kelly op de Weegh. The company will continue to operate its 150 producing wells in the Eagle Ford while allowing potential buyers to review technical data on its holdings. Like many of the largest oil companies, including Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), Shell was late to buy into the shale formations that have become productive sources of oil and gas through new drilling techniques and hydraulic fracturing.  While energy companies began major drilling in the Barnett Shale, which underlies Fort Worth, Texas, in the late 1990s, Shell did not buy leases there until 2006, and did not invest in the Eagle Ford until 2010, the same year Exxon closed on its $31 billion purchase of shale-gas producer XTO Energy. A glut of natural gas that led to steep drops in prices pummeled earnings for both companies. Exxon has switched its shale drilling focus toward areas it believes hold more oil or other liquid fuels, while Shell said it would take a $2 billion after tax write-down on its U.S. shale assets.   Smaller producers have continued to find success in the Eagle Ford. ConocoPhillips (COP) said in August that its Eagle Ford production was exceeding expectations; the company's average daily output there nearly doubled compared with the second quarter of 2012.  Marathon Oil Corp. (MRO) has also said the Eagle Ford is central to the company's plans for growth, and earlier this month announced plans to buy more acreage in the area.  The sale would end Shell's long history in South Texas, where it has operated for more than 50 years. The company has also announced plans to sell 600,000 acres in the Mississippi Lime formation in Kansas.

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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