Peace on Earth - The Energy Report 12/20/16

The dream of peace on earth and good will towards men was shattered once again with two incidents that defy the hopes of the season. The murder of Russia's ambassador to Turkey and the slaughter of 12 people by a terrorist driving a truck into a Christmas market in Berlin is starting to impact markets. Stocks pulled back and oil rallied slightly after the news in light volume as the world still only dreams of peace.  

Now oil prices are edging higher even as the dollar looks as it is getting ready to make new highs. Oil, backed by expectations of OPEC and non-OPEC production cuts as well as signs the US economy is getting ready to take off, is increasing demand expectations and the tightening of supply. We must also be ready for more market sensitivity to terror events as we whittle down the globes cushion of supply. Problems in Turkey have been an ongoing risk to the oil market. Much oil is received from Iraq and the Caspian Sea region that then travels through the Turkish Straits that supply a lot of product to Southern and Western Europe. They are also a key export route for Russian oil. Close to 3 million barrels of oil and other petroleum products travel through the straights and further instability in the region at some point could put that at risk.

Crude oil will become more sensitive to these types of events as the global market starts to tighten. Even as US shale is sure to come back, it will take some time for the industry to catch up with planned OPEC cuts as well as issues of depleted cash. We expect that even as prices rebound, it may be too late for some companies that are teetering on the brink. It’s not going be neat and pretty but we will start to make our way back.

Retail gas prices are back on the rise! AAA says that national pump prices have risen for 20 of the past 21 days, increasing a total of 11 cents during this span. The national average price for regular unleaded gasoline sits at $2.24 per gallon, which is the lowest mark since October. Today’s average is three cents more than one week ago, nine cents more compared to one month ago.

Natural gas is having a hard time rallying even as demand for natural gas is probably the highest we have seen in recent memory. Power generation to fight the cold, even low temperature warnings in cold California, is sparking some alarm. Reuters reported that Southern California Gas Co (SoCalGas) has urged customers to reduce natural gas use to help lower the risk of possible gas and electricity shortages due to what it described as severe cold weather throughout the U.S. Southwest. Reuters said that the notice, issued Sunday night, came as the utility continues to have only limited access to fuel in its giant Aliso Canyon gas storage facility in Los Angeles, following a massive methane leak between October 2015-February 2016. In addition to residential customers, SoCalGas, a unit of California energy company Sempra Energy, told non-core customers, including refineries and power plants, that they may receive a notice to curtail service.   

We continue to favor the long side on oil as we hover just below yearly highs. With the stock market looking to break records, the oil demand story should remain strong. Natural gas should rebound as the full extent of the demand side comes out in the open.

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