Tuesday, April 15, 2014

Ukraine fights back

By Phil Flynn

Ukraine on Tap!

Reports that Ukraine may start military operations may turn around a market that was all of a sudden pricing in diplomacy. A meeting in Switzerland may be doomed to fail as reports that the acting Ukrainian President has said that a military operation to regain control of cities in the eastern Ukraine has begun. Yet in the early going the market is skeptical anything is really going to happen.

Oil (NYMEX:CLK14) and gold (COMEX:GCK14) rallied in yesterday’s session but fell back on reports of slowing Chinese’s economy as well as hopes that a diplomatic solution can be found in Ukraine. Chinese demand for gold is falling against a back drop of an economy that is slowing China’s demand dramatically according to the World Gold Council.

Oil’s risk on trade has been anchored by ample supply and on again off again promise from Libya that oil would soon be exported. Every time oil gets some positive news it breaks. Now it will be interesting to see if we rally on these reports of Ukrainian military movements. Russia, that has troops on the border, has warned that they might intervene if Ukraine moves.

Gas prices are stubbornly high as the seasonal roll continues. With ample gas supply and a break in ethanol we should see prices start to fall next week assuming Ukraine does not go up in flames.

In the meantime one European country looks to get off Russian gas.

Dow Jones reports that German utility RWE AG said Tuesday it has formally agreed to supply Ukraine with natural gas this year, the first such deal by a European energy company after Ukraine's continuing political crisis put the country's traditional supplies from Russia in doubt. RWE said that it would begin gas deliveries to Ukraine's state-owned energy company Naftogaz via Poland immediately. RWE said it would ship gas from its "pan-European portfolio" to Ukraine, but didn't provide an estimate of the expected volumes. The deliveries are part of an existing five-year framework deal that allows RWE to ship up 10 billion cubic meters of natural gas a year to Ukraine, but the gas supplies must be agreed on annually. Last year, RWE supplied around 1 BCM of gas to Ukraine, it said. The gas will be delivered at wholesale price levels, including delivery costs, RWE said.

Russian gas-export monopoly Gazprom OAO earlier this month raised gas prices for Ukraine by 81% because of the debts it said total more than $2.2 billion. Russia later said that Ukraine would only receive gas in return for advance payments and warned that there could be supply disruptions if Ukraine's debt wasn't addressed. The dispute prompted Ukraine to begin talks with European energy companies in an effort to secure alternative gas sources. RWE said supplies from Western Europe could be significantly increased, provided that "various transport restrictions at the Slovak-Ukraine border are politically and technically resolved.

Dow Jones reports that China's appetite for gold is waning after a decade long buying spree, suppressed by the country's economic slowdown and constrained credit markets. Demand in the world's biggest gold consumer is likely to stay flat in 2014, according to estimates from the World Gold Council. Gold demand in China has expanded every year since 2002, when it declined, according to the industry group, whose forecasts are closely watched in the gold market.

Decelerating Chinese gold demand could threaten the recent recovery in gold prices, some investors and analysts say. Gold futures are up 10% year to date, after falling 28% last year, the biggest annual drop since 1981. Unrest in Ukraine, a bumpy start to the year for stocks, and the Federal Reserve's commitment to low interest rates in the long term has propelled gold higher.

Snow and cold should support Nat gas! Producers are ramping up but they had better wow the market! Buy calls!

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