Geopolitical risk spoils party again

Risk Back On!

Just when it looked like the petroleum complex was going to collapse under the weight of ample crude supply geopolitical factors is sending oil higher again. Veiled refines by Gazprom about the low stocks of gas in the Ukraine was another way of saying that the Ukraine was stealing gas. This of course would be a justification in Russia’s eyes to cut off supply.

That comes as Russia moved to raise gas prices by a mere 80% on the Ukraine to punish the country for not falling under the thumb of Russian President Vladimir Putin. Russia In the meantime recalled its ambassador to NATO for consultations just two days after NATO member countries suspended cooperation with Russia over the Ukraine crisis. Just when the market wanted to sweep the risk of a European gas supply cutoff under the rug it seems that that risk is back in play.

Reuters reports that the latest rise will be to $485 per 1,000 cubic meters - two days after Gazprom announced a 44% increase in the gas price to $385.5 per 1,000 cubic meters from $268.5 due to unpaid bills. This is much more than the average price paid by consumers in the European Union.

The market was also disappointed with events in Libya. Hopes that a deal with rebels would reopen Libyan ports and start oil flowing right away were dashed when East Libyan rebels denied they had a deal. Bloomberg Ali al-Hasy, spokesman of self- declared Executive Office for Barqa region, comments by phone, denying press reports that Zueitina oil port to be handed over in days to PM Abdullah .“This is not true, we will first wait for the government to confirm the agreement reached yesterday with its Representatives,” Al-Hasy says. “We will then hold a press conference to announce the details of the agreement and the handing over mechanism of all the ports. It can all be done in a week after the government gives its approval.”  Still there is still hope that this can be worked out but not before this weekend. So with Russia rattling and uncertainty on Libya the market will have a hard time selling off.

Another drop in natural gas supply is adding to fears that we will get back to adequate storage by next winter! Is this market a price spike waiting to happen? U.S. nat gas inventories fell to a dangerously low 822 billion cubic feet meaning that producers will have to produce a record amount of gas something they might not be interested in doing with oil above $100 a barrel. Most nat gas producers are saying they will be producing less gas not more leading to worries that we will be short of supply when old man winter comes rolling around again. Not that he ever left.  We have had a long term target of $700 on gas by 2015 and have written that and reported on the Fox Business Network that  it will be almost possible to get to full storage by next winter.

I am not alone in that assessment. The Wall Street Journal reported that natural-gas prices are too low and put the U.S. at risk of not having enough gas in storage next winter and even beyond, say Citigroup analysts in a note published yesterday.  They point out like I have that supplies are at 11-year lows, after a tough winter fueled demand for gas-powered indoor heating and ate away at a majority of the nation's stored gas. The Journal says many analysts and traders argue that booming production levels, which are projected to hit another record high this year, will allow stockpiles to replenish. Citigroup has argued against this theory for months. A group of Citigroup analysts, led by energy strategist Anthony Yuen, published a note Thursday stating that production growth is likely to be less vigorous than current prices reflect. "The market seems to think future supply should be robust, summer could be mild and winter would unlikely be cold," the analysts write.

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