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."
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