Global and US Energy Report

The following article appeared in the Babson College Financial Report's Energy Section, by Mr.Dantes

Global Energy Conditions:

For the week ending February 25^th, Crude Oil price rose to a 29-month high. Its 8.4% gain is the largest since March of 2009. The spike in prices is due to the recent unrest in North Africa and fears of chaos spreading throughout the Middle East region. The major concern is the risk of Libya’s crude supplies falling short to meet demand. According to the Oil and Gas Journal, Libya boasts 46.4 billion barrels of oil reserve holdings as of this year. A weekly report by Futures Pros states that suspended operations in Libya’s oil fields are escalating. Among the top companies placing a halt on supplies are French Total SA, Norwegian Statoil, Chinese Petro China, Italian Eni SpA, and Royal Dutch Shell.

The New York Mercantile Exchange (NYMEX) reports Light Sweet Crude ending the week at USD $98.20 per barrel. However, prices were given a slight boost as Saudi Arabia and the IEA made a pledge to fill the region’s supply chain gap by releasing crude oil supplies.

Libya is not all about oil. This is one fundamental fact that speculators must realize. According to the Energy Information Administration (EIA), Libya has 55 trillion cubic feet of natural gas – much of it is used domestically, accounting for 45% of the country’s electricity needs. In the export realm, natural gas is more productive than oil in the make-up of Libya’s trade advantage. Libya’s oil exports reached its peak in the late 1960’s, and since then natural gas exports have risen dramatically; increasing the spread between gas exports and domestic consumption. The country’s energy wealth is enough to make it a sustainable trading participant in the North Africa region. The pipelines that link Africa with Southern Europe, flowing west into the Middle East and Asia, then converted to LNG en route to the West on tankers, all start with the natural gas abundance in countries like Libya. The fears about supply constraints are mainly speculative.

United States Energy Watch:

               

Crude Oil supplies in the United States are struggling to gain foot after declines from December through February. The EIA projects a rise in oil production to 5.6 million barrels per day in March, while imports fall to 8.5 million barrels per day. However, projected weekly inputs are down, while monthly projections are up. The spread here shows a forecasted short term boost in domestic production, but a longer term squeeze.

An area of importance is the WTI Brent Spread – a particular type of Crude Oil.  Brent prices have been relatively flat this past week, while other crude oil prices rose. This spread signals excess supply of Brent that will eventually run low, as hedgers buy more in anticipation for higher prices later; a natural market correction. So long as the spread lasts, speculators will gain through arbitrage – selling Brent while buying other Crude Oils.  Brent did tighten due to supply problems and maintenance in the North Sea – its source of production. There are also maintenance issues in the Gulf region, a main arrival artery in the West for Brent.

Meanwhile, natural gas storage is down to 1,830 billion cubic feet in the United States. Rig counts are down by one, and transport conditions are weak. A recent eruption in northern Ontario and maintenance in the Gulf are placing pressure on supply.

Sources:

“Crude Oil Futures – Weekly Review.” Futures Pros. February 27, 2011

“Natural Gas Weekly Update.” EIA. February 24, 2011

“This Week In Petroleum.” EIA. February 24, 2011

“Libya Country Analysis.” EIA. Las Updated: February 2011