Energy's evolving fundamentals

There are a number of factors that drive markets. However, determining why a market will move and when it will move can sometimes feel like an insurmountable task. The old adage “better to be lucky than good” rings true more times than not. But that is not to say that there is a complete lack of market-moving events and trends that traders can capitalize on. While futures prices may have already factored in the seasonal aspects of supply and demand, there are a number of seasonal trends that may present valuable trading opportunities. In addition new fundamental factors come to play. For instance the logistics of moving crude oil from point A to point B is a growing factor on price.

Energy companies use the spring time to replenish stocks. After this year’s harsh winter in the United States, some fear that natural gas reserves won’t have enough time to bounce back to the levels needed in preparation for next winter. With the Energy Information Administration (EIA) reporting better than expected builds over the past two weeks these concerns are easing somewhat, but there is still substantial work to be done. Natural gas is consumed most heavily during the winter, with demand shifting from colder to warmer regions in the summer. Distributors in warmer regions build stocks in the spring, liquidating in the summer time to run air conditioners, typically pushing prices lower.

As kids are let out of school for summer break, the U.S. summer driving season begins. Gasoline consumption reaches its peak during the summer months, rendering the August delivery month particularly important. Florida, the east coast’s biggest gas consumer, has already seen supply disruptions and an increase in prices at the pump. There is plenty of concern about the adequacy of Florida’s stockpiles, which are at their lowest levels since November 2012 according to EIA data. This is worrisome with hurricane season fast approaching.  

Markets continue to become ever more interconnected on a global scale, particularly in our 24-hour internet driven news cycle. No economic news occurs in isolation. The energy markets are a perfect example, as exemplified by the Russia-Ukraine conflict that’s currently center stage. With Russia being a key producer of natural gas and liquid fuels, the imposition of sanctions affects markets internationally. As we have seen, turmoil in South America and the Middle-East has the capacity to cause supply issues worldwide. Similarly, China’s appetite for energy consumption is closely watched the world over.


Key policy issues, such as the Keystone pipeline which would connect the oil sands of Canada with Louisiana, also exert significant pressure on the energy markets. Environmentalists are fighting to block the project altogether, citing pollution concerns. Democrats want to punt it down the road until after November’s mid-term elections. Senator Mary Landrieu (D-La.) is attempting to bypass President Obama, hoping to get the plan approved by the Senate so that it can move along to Congress.

It should go without saying that approval of the pipeline would have significant consequences for the energy industry in the United States. While the environmental concerns surrounding the project may be valid, the fact is that this oil is already being produced and shipped all over the United States, with or without the pipeline.

There have been train crashes and derailments in Alabama, North Dakota, Quebec and Virginia, causing explosions, fires and fatalities. On the same subject, environmentalists will point to the 2010 oil spill in Kalamazoo as evidence of equally serious deficiencies that can exist with pipelines. Clearly, there are good arguments to be made on both sides of the fence. We will have to decide, as a country, where the greater negative externalities lie: with the Keystone pipeline because of pollution and other environmental concerns, or the status quo whereby we transport the same oil by road/railway. In terms of supply and demand, Louisiana is thirsty for discounted Canadian Crude oil, while North Dakota is looking for more efficient ways to move its oil South.

During the past decade, we have become much more efficient at extracting Bakken oil: while it took us 58 years to extract the first 500,000 barrels of Crude (NYMEX:CLM14), it took us just two for the next 500,000! If the Keystone project went ahead, approximately 10% of the pipeline’s capacity would be reserved for the North Dakota Bakken basin.

While the Keystone pipeline case is merely one of many examples, successful energy traders are always on the look-out for emerging trends, key geopolitical events and government action that might move the market, providing trading opportunities. While this may already be priced in, chances are that both the summer driving and hurricane season will affect oil and gasoline prices. If (or should I say when) the Keystone pipeline project gets approved, it will create an influx of jobs, help prevent gas shortages, and stabilize the cost of gasoline. 

About the Author

Jack Malone is a Futures and Options Advisor at RCM Asset Management with a focus on the metals and energy markets. Jack can be reached at