Wednesday, April 2, 2014

Easing tensions puts supply/demand back in drivers seat

By Phil Flynn

High Level Talks!

High level talks between Gazprom and the EU was the final straw that broke the oil market that was already weak against a backdrop of weak global manufacturing numbers and hopes that Libyan oil ports may reopen.

Fears that Russia's state-run gas giant OAO Gazprom would cut off natural gas supply to the Ukraine eased a bit.  Russia said it was ending its discount to Ukraine for natural gas due to non-payment. This would raise Ukraine’s gas prices by a whopping 44%. Yet a meeting between the Gazprom and the EU energy chief raised hopes that the gas would continue to flow. Gazprom Chief Executive Alexei Miller met the European Union's energy chief Gunther Oettinger and they said that Gazprom agreed on the importance of a reliable and secure gas supply from Russia. The comment is a reminder that both parties have a lot to lose if Russia pulls the plug on Europe. While it does not mean that Russia won’t cut off supply at some point it is likely that it won’t happen anytime soon.

Any reduction in the geopolitical risk premium allows the market to focus on ample supply and questionable demand. Reports that Libyan rebels claim that a deal to reopen Libyan oil ports added to the bearish sentiment. The leader of a rebel group in eastern Libya has agreed to end its seizure of several oil-exporting ports within days. While we have heard this before it is possible that Libyan oil may soon start to be exported.

Last night the American Petroleum Institute showed that the collision and oil spill in the Houston Shipping channel reduced the supply of crude oil(NYMEX:CLK14). The API reported that crude inventories fell by 5.8 million barrels almost five times than the average expectations.

Yet on the bearish side refinery runs increased leading to a surprising bearish increase of 18,000 barrels of gasoline supply. That may be one reason we saw RBOB futures take such a big hit!

Yet falling RBOB(NYMEX:RBJ14) prices may not mean that pump prices will fall as supply issues with ethanol are keeping prices high. In fact ethanol is more expensive than gasoline. The ethanol market that was created to reduce our dependence on foreign oil is being undermined by booming domestic oil production. Cold weather and the lack of space on rail cars as ethanol has to compete with oil are leading to shortages of supply. Bloomberg news reports that Ethanol climbed a record 81% in the quarter, surpassing the 65% gain during the third quarter of 2005 when the biofuel replaced methyl tertiary butyl ether as the primary source of octane for gasoline refiners.

Prices at the pump have been rising even as gasoline futures retreated 5% from a year-to-date peak on March 3. Congestion on the nation’s rail lines has delayed shipments from the Midwest, where about 89% of ethanol plants are located, to terminals in the Northeast where it’s blended with gasoline before delivery to filling stations. East Coast ethanol stockpiles are down 21% from a year ago to the lowest level since 2008. “The ethanol market has been screaming,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “But I think gasoline and ethanol are close to the peak and we should pull back over the next couple of weeks.” SBC says that Ethanol saw extreme volatility today April CU traded up $0.22 on the highs before selling after the corn close saw it trade only $0.05 cents higher on the day. Part of the initial run up was due to concerns that available barrels are in very tight supply and the EIA report is unlikely to indicate much relief. Importers are looking for any product available in Brazil for early to mid-April while offers began to retreat as they watched bids chase them up. We will see if supply falls even more in today’s Energy Information Administration supply report.

An 8.2 earthquake in Chile is shaking up the copper market. Chile is the world’s largest producer and worries about mine shutdowns gave prices a pop. Copper mining makes up 20% of Chilean GDP and 60% of exports The FT reported the price of copper traded in New York jumped as much as 6¢ a pound to $3.07 following the 8.2 magnitude earthquake, which struck at 9 p.m. local time. The quake also shook buildings in nearby Peru and in Bolivia’s capital, La Paz, 470km away.

Chile’s Collahuasi mine, a joint venture led by Anglo American and Xstrata close to the epicenter, reported it had suffered no problems. State-owned copper mining company Codelco and London-listed Antofagasta also said their mines were functioning normally, Reuters reported.

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