Happy Friday! And another nutty week comes to a conclusion, as natural gas prices continue on their upward trajectory on expectations of warmer weather (and higher demand), while crude continues to slide. Geopolitical tension with Iran has dropped off the radar as the Euro debt crisis accelerates its deterioration, leaving risk appetite to flee the building. Enough from me, it’s time to eat:

–Startling pictures of the Canadian Oil Sands.

–The ‘dubious’ behavior of Aubrey McClendon.

–Infographic about infographics.

–China excludes foreign firms from natural gas tender.

–Infographic on the skinny on dining out.

–The growth in global nuclear power generation capacity.

–Six wineries owned by rock stars.

–Solar sector looks to Saudi plan.

–11 facts about the ambidextrous.

–Peruvian farmers trade coffee and carbon.

–Infographic on how politics drive our shopping habits.

The Burrito Deluxe Award of the Week goes to St. Louis Federal Reserve President / CEO, Jim Bullard, who dropped by our office yesterday. He was kind enough to answer a couple of questions I had; he said we are no closer to QE3 than we were two months ago, the economy is improving, housing is set to recover, while low core inflation removes the pressure on the Federal Reserve to raise rates. He was adamant that QE3 would not be forthcoming, and although he may have just been towing the party line, it was pretty neat to hear it from him first hand.

The Burnt Burrito Award of the Week goes to talk of the Obama administration tapping the Strategic Petroleum Reserve to bring emergency supplies to the market, despite oil prices having fallen nearly 20% from the highs of the year, amid US stockpiles being at a 22-yr high.

Have a glorious weekend! (it will be if West Ham win!)

Both this event and the escalating farce in Greece have been dictating both the mood and movement in financial markets in this past week, so let’s look at how the misgivings of a European country and a large US bank filter their way back to Energyland™.

Greece

To sum up the Greek debt crisis, it seems prudent to assess its crash course, from steps 1 – 10:

1) Greece joins the euro in 2001, bypassing the stringent debt conditions of the EU through a secret loan from Goldman Sachs (no, seriously). The bank basically lends Greece 2.8 billion euros so its balance sheet would pass the requirements to join the euro currency. By 2005, Greece owes Goldman Sachs 5.1 billion euros.

2) Once in the euro, Greece is able to borrow more money through issuing government debt – and at a preferentially low interest rate as it is considered as reliable as its euro-buddy Germany.

3) 2001 – 2009: Greece goes nuts, throwing money at infrastructure projects, services, and public sector wages, all the while selling more debt to fund this spending spree.

4) October 2009: Then uh oh. The extent of Greece’s vast debt is realized by the EU. Realization also dawns, however,  as to who has the most exposure to this debt…German and French banks ( ah ha! and the penny drops as to why the Eurozone doesn’t want Greece to default on their debt…).

5) And by the way – as an aside – Greece isn’t the only country in this predicament – the rest of the PIIGS have vast debts too (Portugal, Ireland, Italy, Spain).

6) March 2010: Greece comes up with a plan (under pressure from an angry Eurozone) to pay down its debt through austerity measures – slashing spending in the country. It also receives a ‘bailout’ from the Eurozone leaders (its in their best interest to save them, after all), which it also needs to pay back.

7) October 2011: It becomes clear that Greece is not meeting its austerity measures, while the initial bailout is not enough to stave off default fears. The only answer from the Eurozone is to give them another, larger, bailout (?!) and to implement further austerity measures (which may or may not be adhered to). Owners of Greek debt agree to take a haircut (= a 50% loss on the debt).

8) Late October 2011:  The Greek Prime Minister then puts everything in doubt as he tries to call the bluff of the Eurozone by announcing the country will vote on whether or not to accept a second bailout. He is strongly criticized, and promptly resigns. The country continues to scramble to make each next debt repayment.

9) This brings us to the present. Greece continues to face an increasing risk of default as it struggles to service its debt, while its economy is in a downward spiral, in part due to austerity measures (but mostly due to its reckless spending – no.3). Recent elections have seen Greek voters rebelling against austerity, meaning another election is required (on June 17).

10) Given the deterioration in financial conditions this month, the prospect of Greece leaving the euro is now openly being discussed by central bankers.

This tale will not have a happy ending.

…and onto JP Morgan

JP Morgan reported a $2 billion loss last week, after a single trader (nicknamed the ‘London Whale’) took a number of large positions in credit default swaps, which then moved against him. It turns out ‘the Whale’ was called ‘the Caveman’ last year (due to the overly aggressive nature of his trading), as he bet $1 billion on the expectation of certain companies going bankrupt. When bankruptcy hit the parent companies of American Airlines and Dynergy, he hit a jackpot of $450 million.

His history of large gains meant the risks he was taking were largely ignored because of the large profits he was generating (that ole risk / reward thing). Until he struck out. The CEO of JP Morgan, Jamie Dimon, described the Whale’s final trade as ‘flawed, complex, poorly reviewed, poorly executed, and poorly monitored’.

So what is my point?

These two events have been key drivers in the movements in Energyland™ recently, despite their seemingly unrelated or tenuous link back to energy.

The ongoing situation in Greece is weighing on crude for a number of reasons. The prospect of contagion spreading across the Eurozone – and its negative impact on economic growth (ergo, oil demand) – is a key fear, while the simple lack of confidence in the euro is causing a move into the dollar, and weighing on crude (dollar / oil tend to have an inverse relationship).

The worst thing, however, is that no option is favorable. The cost of Greece exiting the euro is estimated at $1,000,000,000,000, while the cost of them staying in is borne by the other Eurozone economies; a lose / lose situation.

As for JPMorgan, the revelation that such a large position taken by a bank could go largely  unmonitored or largely ignored will likely lead to the spotlight of scrutiny being shone on financial trading in the oil markets. This will likely try to manifest itself in tighter regulation. Although some view this as the remedy to stop higher volatility and speculation in the market, the reality is that the presence of speculators is a natural counterparty for those hedging to manage their risk, and for keeping the market efficient and less contrived.

But the ultimate takeaway from the JP Morgan saga is the need for risk management. Which loops us nicely back to what we do here at Summit Energy, and back to my son running head-first into a fire hydrant. Although Greece looks to be beyond smelling salts, JP Morgan – much like my son – will likely be scarred in the near-term, but eventually unscathed by this drama. And both have hopefully learned a lesson – to be more alert.

Hello and welcome to another edition of burrito bites! This week has seen natural gas spurred on once again by the expectation of production cuts to balance the market, while crude prices have seen a perfect storm of bearish news flow, from strong supply from Opec and in the US, to Euro debt concerns, to signs of a slowing Chinese economy. After a rather frazzling week, kick back, and relax with a snack:

–The Derby and the Dow.

–Where have all the oil hedgers gone? (or…Brent trading overtakes WTI for first time since 1995)

–Everything you wanted to know about the Canadian oil sands.

–Quiztime! What’s the main ingredient?

–China’s looming conflict between water and energy.

–The world is not doing all that well on its climate goals.

–10 things you might not know about Maurice Sendak.

–Obesity in US means we consume 1 billion more gallons of gas than in 1960.

–A different way to look at China’s economy.

–7 downsides to being left-handed.

–LNG exports will not cause big price spike.

–Did, err, trapped wind kill the dinosaurs?

–Marginal cost of oil production is moving towards $100.

–Nat gas is essentially free in NGL  production.

–7 things every Facebook  user should know. (h/t Eric Bickel)

The Burrito Deluxe Award of the Week goes to (our boss) Schneider Electric’s acquisition of M&C Energy Group, to expand our global footprint (from huge to humongous).

The Burnt Burrito Award of the Week goes the home ownership rate, which has fallen to a sixteen-year low, even though mortgage rates just hit a record low also. The housing market will never recover at this rate.

Have an immense weekend!

Intergalactic (inv-en-tor-ies!) – US stockpiles have gone intergalactic for both crude and natural gas, with oil inventories at a 22-year high, while natural gas storage levels are 44% above last year’s level.

Ch-Check It Out – For Q1 2012, natural gas accounted for 28.7% of total power generation, a ridiculously rapid increase from 20.7% in the corresponding quarter of last year.

Light My Fire – (…just not with coal…) Not only did coal’s share of total power generation fall from 44.6% to 36% for Q1 2012 versus Q1 of last year, it is also set to decline significantly further in 2012. (Why? Ch-check it Out).

Sabotage – Nigeria is the obvious choice here, as the country where sabotage seems part of everyday life. Not only is the country consistently at threat from oil infrastructure sabotage by the militant group MEND, but it is also currently contending with the sabotage of its electricity supply, having widespread blackouts.

A.W.O.L. – Shoulder-month conditions are in full swing, meaning weather-driven demand for natural gas is going AWOL; it is set to reach its low ebb for the season over the coming weeks.

Triple Trouble – Another track that is applicable to either oil or gas. Triple trouble in the oil complex is coming from the combo of deteriorating economic data out of the US, escalation in the Euro debt crisis (again), and fears of slowing in the engine-room of the global economy (= China). As for natural gas, the fear of falling production, the increase in power generation demand (see opening track, Intergalactic), while an (admittedly super-high) storage surplus is being whittled down – rallying natural gas prices over 30% from the 10-yr low achieved last month.

A Year And A Day – Well, actually, a year and 5 days is when retail gasoline prices peaked in 2011. The good news? Prices in 2012 look like they have peaked a full month earlier this year, reaching $3.94 on April 4^th. They are now at $3.74.

The Sounds Of Science – Technological development in shale oil and gas extraction in the US is spurring on production growth for both sources. The EIA expects growth in marketed production of natural gas  in 2012 (reaching a further record level) despite lowly pricing, while US oil production is expected to increase by 0.5 mbpd to 6.2 mbpd – its highest level since 1998.

R.I.P., MCA.

EXHIBIT 1 – US / EU GDP

Economic growth in two of the key regions of the world fell into the belly of the great recession back in late 2008 / early 2009, as highlighted so starkly below. But although we saw a subsequent bounce, economic growth in the US is only back to showing tepid growth (expected at 2 – 3% this year), while the Eurozone is experiencing a shallow slide back into recessionary terrain.

US and EU GDP

EXHIBIT 2 – US INDUSTRIAL PRODUCTION

Industrial production in the US mirrors this pattern, as a stark fall and rebound has now seen year-over-year growth for 27 consecutive months. That said, growth is at a tepid rate, below 5% for the past 12 months.

US Industrial Production, YoY

EXHIBIT 3 – GLOBAL MANUFACTURING DATA

And these phenomena continue to be reflected across the globe, from the US to Asia to Europe – that of a rebound back to mediocrely tepid expansion. (That is, except for the Eurozone, which – like its economic growth – is back in contractionary conditions).

Global Manufacturing Data (>50 indicates expansion)

EXHIBIT 4 – US JOB CREATION

The fourth and final exhibit is perhaps the most worrisome, as it appears that job creation may be about to break its Van Halenesque-logopose™ to the downside. Again this chart paints a similar picture to the other exhibits, as job creation has been positive for the vast majority of the past two years after a dramatic descent into serious employment losses from early 2008 to early 2010.

But if we have seen the peak of job creation for this business cycle, we are to face rougher times ahead, as around 100,000 jobs need to be created each month just to keep up with population growth.

US Jobs created / lost

As exhibits 1 – 4 serve to illustrate, I am not one egg short of an omelette. Economic data across the board are back to moving broadly sideways after the great recession and subsequent recovery.  The greatest threat now, as highlighted by Eurozone GDP and US job creation, is that we are seeing signs of a slowdown once again.

With this in mind, flatlining with tepid growth seems a relatively attractive option. I leave you with some words of wisdom from one of Van Halen’s most famous songs….you’ve got to roll with the punches.