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This Week In Energy: Why Anything Can Happen in 2015

This Week In Energy: Why Anything Can Happen in 2015

The New Year is upon us but oil prices are carrying on the trend from the second half of 2014 and continuing to drop, with the thirteenth negative week from the last 14 and lows not seen since 2009. With early morning volatility seeing rises of 3.5% and subsequent falls of 2.3%, trader concerns over the continuing supply glut are outweighing any early positioning opportunities in the New Year. Energy stocks overall on Wall Street were the worst performing of 2014 with a drop of over 9%, but utilities had been performing surprisingly well through December before a 4% drop at year’s close to finish 2014 up by 28%. With approximately 40% of U.S. power generation now coming from natural gas, an increase of 28% over recent years, gas-based utilities look poised to be early over-achievers this year.

If current energy and currency market trends continue, 2015 could prove to be a huge year for the United States as a combination of weaker commodity prices, a strong dollar, and steady economic growth, especially in a global context, create huge foreign flows coming into the U.S. market which could all potentially lead to the fastest pace growth in a decade. The U.S. Dollar has continued its strong performance at the end of 2014, and this week has hit its highest level since March 2006. Problems for competitor economies in Asia and Europe have resulted in the dollar index, which measures dollar strength against several other major currencies, reporting 9 year highs of 90.90 as of this morning.

Against the Euro, the dollar has reached a four and a half year high and against the Yen, a seven and a half year high. All of this points to the U.S. being the global market leader early in 2015, in spite of the so-called oil price war with Saudi Arabia and early job losses as the oil and gas industries respond to a lower price climate. Regardless of the worrying particulars of the U.S. energy scenario on its own, it is important to assess it in context: China’s economy is slowing as it moves from investment to consumption; Japan has fallen into recession and Russia faces a similar threat in the near future; and growth in Europe is crawling. Faster growth in the U.S. would most likely lead to interest rate action by the Federal Reserve which would draw yet more foreign investment, further increase the strength of the dollar and potentially destabilize foreign currencies (the yen and the ruble being examples of two that are currently struggling to compete).

Surprising news has come from Russia as we begin the New Year, with oil output for 2014 reaching a record high average of 10.58 million barrels per day. The Russian Energy Ministry data also highlighted new records for oil and gas condensate production in December of 10.67 million bpd. Russian energy exports to China also reached new highs of over 22.6 million tons (452,000 bpd) with this forming an integral part to Russia’s post-sanctions strategy of diversifying its international energy clients with a specific focus on the Asian markets. The Energy ministry is forecasting a decline to 525 million tons in 2015 in light of falling oil prices and an impending recession, while the IEA is predicting a 1% drop in oil output overall for 2015. Gazprom released figures indicating an output drop of 9%, an all-time low, citing the conflict in Ukraine as the main reason.

Urgent Note: This week, our top energy trading analyst Martin Tillier discusses one key energy sector with its back against the wall that looks set to come out swinging in 2015. In this report, Martin will guide you to where the smart money should go to take advantage of the best opportunities this sector has to offer while offering a healthy risk/reward balance. To find out what stocks in what sector make the most sense this early in 2015 – click here and start a 30 day free trial to Oilprice Premium.

As North America has moved towards greater energy independence, high cost techniques employed aside, the “geopolitical risk premium” of oil prices has all but vanished, as highlighted by the failure of the energy markets to react significantly to news of attacks on oil export facilities in Libya or the uncertain condition of Saudi Arabia’s king, who was admitted to hospital recently. This would seem to indicate that, irrespective of geopolitical instability in Libya or a potential change in the Saudi Arabian monarchy, business will continue as usual for the U.S. and for Saudi Arabia, the two protagonists in the supposed oil price war. "They'll pursue the same security arrangements with the United States. They'll maintain Saudi Arabia's commitment to fight the Islamic State. They'll also be pumping oil because there are broader strategic interests the kingdom is pursuing," David Phillips, former senior advisor to the State Department. But with the growth of oil and energy investors as a major asset class within North America, there exists the risk that investors could collectively decide to dump their energy stocks should prices continue to fall, or drop rapidly in a short space of time. According to Tom Kloza, global head of energy analysis at the Oil Price Information Service: "If panic hits those financial companies that have a lot of exposure to oil on the upside, the numbers you may think are burlesque or hyperbole like $35 or even $25 suddenly become real possibilities, if only for a brief period of time," said Kloza. "Anything can happen in 2015."

The best way to stay on top of the energy markets as we begin the New Year is by adding your name to our Oil & Energy Insider investment community and gaining access to our industry-leading intelligence archives and second-to-none trading analysis.

Best regards,

James Stafford
Editor, Oilprice.com

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  • John Scior on January 03 2015 said:
    It is my opinion that Saudia Arabia is attempting to eliminate alternative suppliers and or energy resources to protect the oil reserves they have in ground. If we take the number of proven reserves at 200 billion barrels and say multiply that by 40 per barrel, you are looking at a bank in the ground conservatively estimated at 4 Trillion dollars. Competing technology like the Tesla electric car and cellulostic ethanol are starting to be serious competition to the petroleum combustion engine. A 39 Billion dollar temporary budget deficit is well worth weathering if it preserves the value of oil in ground. Who knows what the true reserves are. The one thing to keep in mind is if you have oil in your backyard, you don't want people to find other transportation means or competing fuels. We've been through this before. There is an excellent publication dated February 1981 by National Geographic in a special report on energy that details many of the technologies that have recently been getting a second wind. What happened 33 years ago that the problems are reappearing? The price of oil went up, it encouraged further exploration, more production came online and the emerging technologies went by the side of the road. People will invest in an electric car if gas keeps going up and up, but it makes little sense with gasolne at a declining price level. The same goes for ethanol or biodiesel based fuel alternatives. They are a serious economic competitor if oil is hard to come by and you pay through the nose to travel back and forth to work but it is illogical to invest at a higher price for an electric car or alternative fuel if you can obtain gasoline as a fairly reasonable choice. The truth be told is I learned in my studies at the Ohio State University that the last drop of oil will never be pulled out of the well because at some point the cost of extracting oil will be so much that cheaper alternatives will be found. Look back at the whaling days when people used whale oil to light their lamps. As whales became harder to find, oil was drilled and pumped out of the ground. Most of the whale species survived. I personally believe a methanol based fuel economy makes the most sense as you can run engines off methanol or by tweaking it, can convert it to gasoline. It can be made from coal which is in worldwide abundance. Once all the "chumps' are cleared out of the market as people stop investing in fracking wells or electric cars or biofuels and the companies that are championing these causes cannot meet their debt obligations, guess what , once again the burnt fools finger will go wabbling back to the fire. US consumers will go back to big SUV's and who wants to fix a leaky roof when its nice and sunny. We will once again be shocked by high fuel prices and suddenly the technologies that have emerged and that I predict will start to flounder in light of lower oil prices, will once again be developed and take a third or forth glance at.
  • David Hrivnak on January 04 2015 said:
    I calculate my electricity is about $.80/gal on a gasoline equivalent. So even at these lower rates an EV is compelling for me. Then add the fact I can easily produce our own electricity. And even if I use the grid my emissions are half so again a third good reason for an EV even with today's prices. Prices that I am sure will rise.

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