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This Week in Energy: Pump Full of Geopolitics and Speculation

Chaotic preparations for presidential elections in Ukraine this weekend, a coup-in-the-making in oil giant Libya and the wider implications of a long-awaited Russia-China gas deal top the global energy agenda this week, but for the average American, it’s prices at the pump in advance of holiday driving that has top priority, and the role of speculators takes center stage.

Speculators generally don’t understand geopolitics, which requires detecting patterns of incidents that ripple through countries and regions and predicting how the dominoes will fall next. And while world events play a hefty role in dictating the price of oil, and in turn what Americans pay at the pump, it is how speculators perceive these events that truly dictates prices.

The Commodity Future Trading Commission reportedly shows speculators loading up on bets that crude will continue to climb.

“Typically traders, speculators and money managers are trying to gauge [the] current supply situation and medium-term outlook,” Justin Jenkins, a research analyst at Raymond James, told CNBC. “When you combine tensions outside the US with relatively limited [domestic] supply, it makes the market ripe for more than usual speculation.”

Amid a natural gas boom in North America, consumers are obviously wondering why prices at the pump haven’t seemed to reflect this. But this is the century of artificial markets, and things are no longer dictated by existing supply and demand—rather by “futures”.  And predicting the future of futures is a tricky business that baffles the most astute economist. The best anyone can tell the US consumer is that it will be another summer of speculation.

In the meantime, we can expect no reprieve from oil price-shaping incidents like the crises in Ukraine and Libya.

Pro-Russian separatists are taking over polling stations in Ukraine’s east ahead of 25 May presidential elections. Last night, at least 13 Ukrainian soldiers were killed by separatists at a military checkpoint in the eastern city of Donetsk.

Amid this crisis, China has signed a 30-year, $400-billion gas deal with Russia’s Gazprom in an Asian gas coup that Moscow has been waiting on for years. Some analysts are concerned that this deal, which includes a massive new pipeline from Russia to China, will increase competition for natural gas beginning in 2018 and in turn lead to an increase in natural gas prices for the European Union.

The flip side of this equation is that it could finally provide Europe with the will and daring to seek alternative supplies in earnest—including liquefied natural gas (LNG). Even the crisis in Ukraine has not been enough to pressure Western Europe to take on the Russian gas bull.

Then we have Libya, where what can either be described as a rebel-takeover or a coup is fully underway.  Las week, rebels led by former General Khalifa Haftar stormed the parliament and dissolved the General National Congress, vowing to take down lawmakers and extremist groups.

The violence has led Repsol and Total, among others, to withdraw some staff from Libya and to reduce their presence in the capital, Tripoli.

Overall, Brent crude prices held at just over $110 per barrel on Friday, for a second week, largely thanks to the chaos in Libya and Ukraine.

James Stafford
Editor, Oilprice.com




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