The Gas Will Flow
Energy Prices are easing overnight as Russia vows to keep the gas flowing despite some provocative comments about the events in Ukraine. Risk premium is oozing out even after Russian Prime Minister Dmitry Medvedev has said that Ukraine’s new government is not legitimate. Yet at the same time he said that any legally-binding Russian-Ukrainian agreements "must be honored". In other words the immediate risk of a supply cutoff will not be at risk in the near term. That means that the EU will not be scrambling to replace supply that the 31% of EU gas imports, 27% of crude oil imports, 24% of EU coal imports, 30% of total EU uranium imports will not be at risk and fears that the reduced the gas price to the Ukraine $268.50 per 1,000 cubic meters, from the $400 which Ukraine had paid previously will continue to flow.
So instead the oil market can shift focus to worries surrounding China and other emerging market economies. Worries about the ramifications of the Chinese yuan that hit a six-month low has traders wondering if this is an ominous sign of the wheels coming off of the Chinese economy. It also has traders wondering about the reverberations for the rest of the emerging markets that have already struggled in this new era of U.S. tapering.
This of course has to be balanced with the expectation of another drawdown in Cushing Oklahoma. The flow of oil out of Cushing down to the Gulf Coast has increased the price of West Texas Intermediate crude to the Brent crude. As I predicted years ago this is another sign that WTI is reestablishing itself as a global benchmark. With the U.S. becoming a number one producer a major importer and a major user the U.S. will be the oil hub to the world. The Brent benchmark is becoming broken do sporadic North Sea and African production.
Natural gas cracked(NYMEX:NGJ14) as weather forecasts and the impending option exportation. Volatility has gone through the roof and the threat of the end of the contact has put off the longer term fears of reaching maximum storage by next winter. Buckle up anything can happen today and probably will.
Gold(COMEX:GCJ14) continues on what will probably turn out to be one of the greatest comebacks in the history of the gold market. Perhaps the biggest sign that a major bottom was in the offing was when speculators amassed the largest net short position in the history of the gold market well below the cost of production. In the meantime as traders dumped gold ETF’s in record amounts the physical demand stayed strong. In fact last year consumers around the world bought gold in record amounts in 2013, led by demand in China and India, with China becoming the world’s biggest gold market, according to the latest World Gold Council. Now if you compare this to other times when gold got smashed like this like in the early 70’s the market rebounded to retake the highs. After last year’s 28% decline, gold is now 11% higher this year and looks to go higher as fears surrounding a housing bubble in China and worries that Europe is falling into deflation that will force the EU to provide more stimulus.
We also saw a historic disconnect with the price and demand for the product. In 2013 the gold market saw 21% growth in demand from consumers which contrasted with outflows of 881t from ETFs. The net result was that global gold demand in 2013 was 15% lower than in 2012, with a full year total of 3,756t to world Gold Council figures. That seems to suggest that either the ETF buyers are wrong or the physical buyers are wrong.