It’s not that I am the hugest fan of Northern Irish band Snow Patrol (although songs such as ‘How To Be Dead’, ‘Run’ and ‘You’re All I Have‘ are terrific), but it was the release of their new album ‘Fallen Empires’ this week with the single ‘This Isn’t Everything You Are’ which has set me off on one almighty tangent…
Given the focus placed on prompt month commodity price movements, it’s easy to ignore the bigger picture and forget….this isn’t everything they are. So given the release of Snow Patrol’s sixth album, here are six pertinent factors which are impacting the bigger picture: the longer-term outlook for our dearly beloved commodities.
1) CRUDE OIL - The latest zinger of a market-mover for crude oil, and specifically Cushing, Oklahoma-based WTI (West Texas Intermediate), is the announcement yesterday that ConocoPhillips is selling part of the Seaway pipeline to Enbridge. Err, that’s fascinating, Burrito boy, I hear you mutter. But, aha! It is. And this is why: Enbridge will reverse the directional flow of the Seaway pipeline, which has been sending crude oil from the Gulf Coast to Cushing, exacerbating the supply glut and distorting the price of the US crude benchmark.
The flow reversal is likely to occur in Q2 of next year, initially draining 150,000 barrels a day from Cushing before ramping up to 400,000 by early 2013. This, combined with rail infrastructure being built out and the impending Keystone XL pipeline (see no.5) means the spread betwixt WTI and the other prominent global benchmark, Brent crude, has dramatically narrowed from $27 to single digits in a very short clip.
2) NATURAL GAS - In complete contrast, the more bearish the immediate natural gas market looks (hark, $3.40 on the prompt month, with a side salad of record storage and record production), the more bullish the outlook becomes for LNG exports in the latter half of the decade.
Last week the US senate met to review the licensing and permitting of LNG exports as they grapple with the concept of what global trading will do to the pricing of this previously domestic fuel. Regardless of the outcome, regulatory approvals and long-term deals are already being put in place, and gathering momentum.
3) CRUDE OIL – There has been quite a turnaround in the return of Libyan oil production since dictator Colonel Gadhafi was effectively removed from power in late August. Back then, production had slowed to a mere trickle, with a return to pre-war levels not expected for up to three years. However, less than three months later (and after the subsequent death of Gadhafi) oil production is back up to 500,000 bpd, with as much as 800,000 bpd expected by year-end.
A return to pre-war levels is being targeted as soon as mid-next year by the country’s National Oil Company. Although this appears overly optimistic, the reality of this coming to fruition is much closer than it appeared less than a quarter ago.
4) NATURAL GAS – Despite fracking coming under increased scrutiny in recent weeks, from secretly audiotaped conferences to the US government’s warning of ‘serious environmental consequences’ to the confession that fracking has caused minor earthquakes in the UK this year, the EPA announced they will release their initial findings on a study into fracking in late 2012, with the full report to follow in….2014. Wow, that’s a while away.
5) CRUDE OIL – The Keystone XL pipeline debate has gone from being a sideshow to a media circus to a soap opera in the past few weeks, as the proposed pipeline to move oil from Canada to the US Gulf Coast has met increasing opposition from environmentalists, leading to thousands of protesters encircling the White House.
Their protests were two-pronged; in part due to the detrimental environmental impact of extracting crude from the Canadian oil sands, and also because of the risk of an oil spill on the pipeline’s path through an aquifer in Nebraska. After the pipeline’s approval was basically postponed by President Obama until after next year’s presidential election, a new route has been proposed in recent days and will likely receive approval.
Rhetoric out of the Canadian Prime Minister Steven Harper at the weekend talking up alternative markets for Canada to sell crude to may have speeded up some resolution to the matter…‘this does underscore the necessity of Canada making sure that we’re able to access Asian markets for our energy products’.
Regardless, the recent unwinding in the spread between WTI and Brent crude oil has pushed WTI prices into backwardation (where near-term prices are higher than those further along the futures curve) – something hardly seen in the last three years or so - as buying interest for WTI has rallied near-term prices considerably since last month:
6) NATURAL GAS – The Senate on Tuesday introduced the NATGAS Act (the New Alternative Transportation to Give American Solutions Act), which is legislation to provide tax incentives to trucking businesses to buy natural gas engines. Although there is immediate high skepticism of the bill being passed, it does provide policymakers with a framework to develop a new blueprint on a bi-partisan basis. Another reason to be optimistic about future demand for natural gas.
So that’s my six cents worth on some of the forces that are influencing (or set to influence) longer-term pricing for natural gas and crude oil. Crude is currently caught in the winds of change as the Keystone pipeline, Libyan production, and ‘the Cushing syndrome’ are all seeing immediate progress, set to rather dramatically alter the dynamics of the global crude complex going forward.
As for natural gas, all its influences remain slow-burning as LNG exports, legislation, and government studies are in the works and raising questions, but yielding no immediate answers. The outlooks for both commodities, however, point to a fascinating future and highlight that the price movements on the prompt month contract…isn’t everything they are.