Fuel for Thought – Nov 4th

04 Nov, 2011

Macro backdrop for energy markets continues to deteriorate:  We were sceptical of the latest European bailout package last week, and are even more so after the announcement.  The flaws in the bailout package, summarised in an excellent article here, are likely to be tested by financial markets which are behaving in an increasingly disorderly fashion.  Meanwhile Purchasing Managers Index (PMI) data released this week points to continuing weakness in global manufacturing activity.  PMI deterioration in Europe over the last few months is well illustrated here, while official PMI data from China also showed continued weakness, particularly in export orders.

The oil market may be tight, but the price is falling: Some strong fundamental arguments supporting structural oil market tightness have been published by prominent market analysts this year.  More importantly, market positioning data such as long/short ratios, suggest that players are supporting this bullish view with their money.  But as set out here it is difficult to argue with the market price.  The downtrend in oil prices over the last 6 months suggests the impact of global economic weakness may be dominating other factors. 

Global LNG price convergence: The IEA has this week pointed to the emergence of the US as a major LNG exporter as being a key factor in driving global LNG price convergence.  While this would clearly be a supporting factor, the building blocks for price convergence are already falling into place.  LNG infrastructure and shipping capacity is rapidly expanding and contracts are becoming increasingly flexible facilitating locational arbitrage.  While regional price divergence will always be a feature of the LNG market in the short term, structural price divergence will increasingly be bounded by transport differentials between market hubs.

Statoil unimpressed by UK energy policy uncertainty: A senior Statoil gas executive made clear his concerns over the uncertainty surrounding UK energy policy this week.  The UK government should be concerned by these comments given the importance of Statoil as an important gas producer and investor in infrastructure to service the UK market.  But the conflict over energy policy within the UK’s coalition government appears to have escalated, with Energy Secretary Chris Huhne telling the Renewable UK conference “We’re not going to save our economy by turning our back on renewables”, a loosely disguised challenge to the Chancellor’s recent concerns over the threat that decarbonisation poses to UK competitiveness.

Picture of the week:

Escobar LNG, Argentina’s second LNG import facility located on the Parana River thirty miles from Buenos Aires.  Escobar has been designed to supplement Argentina’s gas imports in times of peak demand, particularly during the winter.  The facility utilises the Energy Bridge floating storage and regasification vessel technology developed by Excelerate Energy which is much cheaper and more flexible than a conventional LNG facility.