Production growth battles geopolitical risk in energy space

Risky Roundup

Markets across the globe are trying to price in a wide array of risk factors and as bad as that is it might have been a lot worse if it were not for the shale gas and oil revolution in the United States. The International Energy Agency seemed to say just that in their latest report. The EIA says that pressure on global oil markets will ease in spite of rising geopolitical tensions because of surging supply from Iraq and other producers like the United States. Iraqi oil production hit a whopping 30.49 million barrels a day which was the highest levels in 35 years.

This should be a stark warning to Vladimir Putin whose folly in Crimea could force his energy customers to seek a more stable supplier. Russia is very dependent on energy exports and the IEA says that at this point the West and Russia are mutually dependent on each other, but that could change in the near future with global supply on the rise. From a long-term view this invasion of the Crimea could do lasting damage to the Russian economy and while the Chinese may keep buying Russia’s oil they obviously are having problems of their own.

The Guardian reports that “China is braced for a wave of industrial bankruptcies as its slowing economy forces companies with sky-high debts to the wall, the country's premier has said. Premier Li Keqiang told lenders to China's private sector factories they should expect debt defaults as the world's second largest economy encounters "serious challenges" in the year ahead.

Speaking after the annual session of the national people's congress, Li Keqiang said: "We are going to confront serious challenges this year and some challenges may be even more complex."

He told lenders to China's private sector factories they should expect debt defaults. Li said China must "ensure steady growth, ensure employment, avert inflation and defuse risks" while also fighting pollution, among other tasks. "So we need to strike a proper balance amidst all these goals and objectives," he added. "This is not going to be easy," he said.

Li's warning followed the failure of Shanghai Chaori Solar Energy to make a payment on a 1bn yuan (£118m) bond last week. The default was the first of its kind for China and widely seen as pointing to the end of 11th-hour government bailouts for troubled enterprises”

Both China and Russian stocks have been hit hard but don’t look to the euro for safety. Mario Draghi, “Mr. Whatever it takes” is showing his displeasure with the currency’s resent assent.  He is warning that the assessment of price stability is becoming increasingly relevant. Worries about deflationary pressures could inspire stimulus from the ECB. This of course would be a new course for the European Central bank that in the past has been more focused on fighting inflation over everything else.

While the comments by Draghi seemed to slow gold’s epic and historic run it did not break it because it only will enhance gold’s stature as a safe haven in an increasingly unsafe world. Add to that the historic divergence that we have seen between stocks and commodities are reverting to the mean. Gold prices went inverse to stocks at a historic pace now looks poised to recapture everything it gave up last year.

Oil of course is falling as demand prospects are looking more-shaky. Brent crude which gained on WTI earlier on reversed as U.S. economic data suggest that our demand be a bit better that anticipated. Still with U.S. stocks taking a hit the Brent/WTI spread could widen as the show down over the Ukraine will wait for the vote that could provide cover for Vladimir Putin incursions into other countries.

Spring is springing and it has waged on Nat gas prices, still don’t look for prices to fall too far as to have high prices producers will have to be inspired to produce at a record pace.  

 

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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