Fuel for Thought – Feb 17th

17 Feb, 2012

Commodities confront bimodal world:  Commodity markets are confronting what PIMCO CEO Mohamed El-Erian terms a ‘bimodal world’.    Rather than being focused around a single mode, the distribution of potential outcomes for the global economy is increasingly determined by whether unprecedented policy intervention will support a sustainable recovery (a higher mode) or whether there will be a disorderly downwards spiral of sovereign defaults and debt deflation (a lower mode).   Vast liquidity injections from the European Central Bank and signals of further aggressive monetary policy from the US Federal Reserve have seen market sentiment move back towards some form of recovery over the last two months.  This has helped support commodity prices, particularly crude oil, although John Kemp questions the sustainability of the oil recovery given market positioning.  However downward price pressure has remained in the coal market suggesting further weakness to come, given robust supply from exporters and the notable absence of China in the spot market.

Japan LNG imports jump:  Japanese LNG imports in January increased by a headline grabbing 39% compared to 2011, with Japan having only 3 of its 54 reactors back in operation since the Fukushima disaster.  This has been a big driver of tightness in the Asian LNG market over the last year and of price divergence from Europe.  The process behind the Japanese government granting permission to restart nuclear reactors is a complex one.  But Japan is unlikely to make a structural shift away from nuclear power given the cost involved in importing fossil fuels.  So the impact of Japanese nuclear closures on the LNG market is a known quantity and one that will diminish over time.  It does however mean that if Europe were to face a major and prolonged supply disruption this winter it may be exposed to a sharp jump in gas prices as it is forced to compete with Asia for LNG cargoes.  So far European supply has held up well despite the last two weeks of colder weather.

UK solar rhetoric versus reality:  The UK government recently announced an ‘aspirational’ target of 22GW of installed solar capacity by 2020.  At the same time the government announced across the board cuts to solar subsidies to reflect falling technology costs.  It is difficult to see how the target and the support mechanisms are consistent, particularly given the government’s track record of decision making on its approach to solar subsidy levels.  It is also questionable whether the government should be focusing on ambitous targets for a relatively expensive and inflexible generation technology when it could be putting those resources into developing an effective energy efficiency policy.


Picture of the week:

A map of the weather pattern that has caused the recent cold snap across Europe.  The cold weather has been driven by the jet stream, which acts as a divide between polar air to the north and warmer air to the south, exhibiting unusual characteristics.  From early February the jet stream has been bulging south, allowing colder air from the north to flow into Europe.