In response to the Ruble’s recent fall (over 50% against the U.S. Dollar), Swiss banks have begun taking extreme and extraordinary measures in what appear to be early signs of a currency war. There is now a negative interest rate of 0.25% on deposits made in Swiss Francs. In combination with pre-existing efforts such as Zero Interest Rate policies and quantative easing, we are now entering an era of Negative Interest Rate Policies. These kinds of policy decisions will do nothing to allay fears about economic slowdown in Europe and Asia and the looming threat of another financial crisis. Worries about debt-bubbles propping up the US shale scene seem to already be influencing international banking policy, with strategies now revolving around insulating any potential risks should it all turn sour in 2015 for key global currencies.
In addition to the Ruble’s near 50% decline against the dollar, the Japanese Yen is down 20% against the U.S. Dollar since the summer. This comes as welcome news for struggling Japanese industry as it improves export prices against import prices in favor of Japanese workers. As part of the Abenomics strategy unveiled over two years ago by the Japanese Prime Minister Shinzo Abe, by flooding the market with Yen he hopes to reinvigorate domestic industry. Given his re-election this December, his policy seems to be popular if somewhat unsuccessful thus far. Off the back of this election victory, the pro-nuclear Liberal Democratic party has greenlit the re-opening of two nuclear reactors in the Takahama project, bringing the current approved number to four with a final total of nine expected to come online in total in 2015. The restarting of these reactors could prove crucial as Japan struggles with expensive, dollar-linked imports of commodities such as LNG and crude oil. It will likely have a positive impact on languishing uranium markets should the go-ahead be given for all nine but only time will tell.
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Meanwhile, U.S. Natural gas prices dropped by 29% in the last month, owing to milder than expected winter temperatures, and they are expected to remain lower for some time. This will lead to yet more consumer savings on electricity and heating bills as natural gas accounts for 26% of U.S. electricity generation. This comes at a time when falling oil prices have already impacted gasoline prices at the pump in favor of consumers. Natural gas prices are notoriously volatile and, given that one fifth of U.S. gas production comes from associated gas found while drilling for oil, the expected slowdown of drilling in the US shale scene in 2015 may drive natural gas prices up as associated gas levels drop in turn.
The U.S. Department of energy has a released a report stating that U.S. oil reserves grew by 7.26 million barrels, contrary to the expected 1.8 million barrel decline that had been forecast. Gasoline reserves were up by 4.1 million barrels, over six times the expected amount, with refiners breaking records of 9.92 million barrels per day processed. In order to achieve this, refineries operated at a rate of 93.5% utilization. On top of this, crude imports rose from 7.1 million barrels the previous week to 8.3 million barrels. Crude oil and gasoline inventories are 5% and 3% higher, respectively, than this time last year. The increase in imports comes as part of Saudi Arabia’s shock and awe tactics that are aimed at leveraging more expensive North American shale oil out of the market. Thus far, it appears that the decision not cut production and thus flood the United States with cheap oil may be working.
In the Middle East, amid discussion of OPEC’s decision not to cut output and dissension in the ranks, the situations in Libya and Iraq provide more long-term concerns for the energy markets. In Libya, the civil war is heavily centered on the country’s natural resource production and infrastructure. Yesterday, a rocket attack on the oil export terminal of Es Sider, though ineffective, served as a stark reminder that Libya’s energy production future is far from secure. In Iraq, despite recent agreements reached with the semi-autonomous government of Kurdistan regarding crude production and export, the government in Baghdad is now revising wildly optimistic production estimates released in June amid growing concerns over development of the oil industry in light of the ISIS insurgency. In the global context, Iraq was already being tipped as a forerunner for the next ‘oil boom nation’ that would fill the void left by an expected slump in U.S. shale sometime in the next two decades. Geopolitics are now more intrinsically linked with the energy industry than ever before and, as such, the volatility of key natural resources prospects in both Africa and the Middle East may provide worrying cycles of glut and shortage for years to come with dramatic impacts on the global energy markets.
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By James Stafford of Oilprice.com
