Is demand destruction in energy at hand?

China Contraction

Weak China manufacturing data is cooling off a red hot petroleum complex. Winter storms and rising geopolitical risk has driven the trade yet more cracks in the emerging market may temper the markets gains. The HSBC Purchasing Manager’s Index fell to deep into contraction hitting a 48.3, which was a seven-month low. This comes a day after the Fed seemed to argue about the right time to raise rates but paid little attention to the impact that reverberation that the taper was having on other markets like China.

In the meantime, a shaky cease fire in Ukraine is still increasing risk. Russia is already threatening to raise prices on natural gas which could lead to a shutoff in the future. The Ukraine of course owns the pipelines that bring Russian gas to the EU and the threat in the region is increasing the possibility that the EU will have to look for alternatives just in case.

Maybe Saudi Arabia will try to fill the gap. Bloomberg News is reporting that Saudi Arabia, the world’s biggest crude exporter, probably needs to boost shipments this year to keep pace with record government spending, according to a former adviser to the nation’s finance ministry. The country needs to at least match the 7.54 million barrels a day it shipped last year and will probably need to sell more, John Sfakianakis, chief investment strategist at Riyadh-based MASIC, an investment company, said by phone today.


He previously worked as chief economist for two Saudi Arabian banks and worked in the ministry of finance as a full-time adviser between 2011 and 2013. Extra shipments could be negative for oil prices because of expanding supplies elsewhere. Iran, Iraq and Libya, among countries with the world’s biggest reserves, will pump more crude this year, according to the most accurate forecasters surveyed by Bloomberg in December. Saudi Arabia is known as a swing producer as it alters supply depending on demand.” Saudi Arabia’s spending has been higher than the government anticipated every year since at least 2008, according to state-owned National Commercial Bank. Its expenditure last year was 925 billion riyals ($246.7 billion), compared with 820 billion riyals that it intended, NCB data show.


Crude oil prices will decline to about $100 a barrel for Arab Light this year from $106.4 in 2013, NCB estimates. The grade makes up about half the nation’s exports and the slide in price will reduce oil revenue to $283 billion, the lowest since 2010, the bank predicts. Saudi Arabia plans to spend everything it earns this year, the Ministry of Finance said in December. Revenue is expected to be 855 billion riyals this year, it said. The Kingdom exported crude at about $104 last year and prices may drop to $100 in 2014, Riyadh-based Jadwa Investment Co. said on Dec. 24. The country will need a break-even oil price at $85 this year, Jadwa said.


Natural Gas is soaring as weather forecasts seem to throw a monkey wrench in the predictions of bearish market players forcing them to blow out of short positions. It looks very likely that if this forecast holds up we will most likely end the storage season below 1 trillion cubic feet. It also means that it is possible that we may not reach full storage going into next winter. As the heating degree days continue to pile up and strong non heat related demand continues the bulls now own this market. Pollyanna predictions of fuel switching and ramping up production seem to be falling apart. Even hopes that production will soar this summer to respond to the market could be overly optimistic as infrastructure may not be in place to produce the record amounts of supply that will be needed. The switching back to coal that many are predicting probably won’t happen as many are predicting! Don’t make the same mistake of underestimating this market that many have already made.

And of course unfairness in the way Natural gas options are margined becomes apparent. The assault on the small investor continues as the exchange raises margins on fully paid bull call speeds. This gives a huge advantage to larger traders and option sellers.  If you buy an out of the money bull call spread and pay for it its ok. But if the futures start to go your way the exchanges forces you to add money despite the fact that the futures spread may not expire for years. Then they settle the spread in some cases at the same price to trigger a call.

On the one hand they are saying with the settlement that the spread has no chance to make money but we are raising the margin just the same. You can’t have it both ways.  This may force traders to adjust positions based on implied risk that does not exist. This unfairness in the margining process must be abandoned... This is hurting liquidity in the options and is forcing the client to put more money at risk in this challenging environment that they should have to.    


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 Learn even more on our website at


Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.

comments powered by Disqus
Check out Futures Magazine - Polls on LockerDome on LockerDome