Wednesday, June 13, 2012

Dynamic Energy Markets Underlie Price Shifts

The charts below illustrate how prices for energy products that once moved together sometimes move apart. And sometimes the opposite occurs as in coal vs gas, when prices for different energy products converge.

WTI dropped below Brent due to a backup of North American oil in Cushing, Oklahoma. As new pipelines are built -- assuming a defeat of the US energy starvationist agenda in November -- WTI and Brent should converge toward a middle ground.
WTI vs Brent

Western Canada Select (WCS) is selling at only about $59 a barrel. This reflects the heavier nature of WCS, and the need for more expensive refining facilities to extract and refine its valuable components.

The North American price for natural gas is much lower than the price in most of the rest of the world, reflecting significant advances in the technology of gas extraction in North America. The price differential between oil and gas per mmBTU has long hinted at an "oil price ceiling effect" of the new natural gas bonanza, sooner or later -- one way or another.

Shell is planning to build LNG pumps at 100 US interstate truck fueling stations.

Other ways in which natural gas is beginning to substitute for oil is via the petrochemicals industry (ethane cracking for plastics etc.), via gas to liquids (gtl) conversion of natural gas to diesel, increased use of compressed natural gas (CNG) in vehicle fleets, and more.
As more uses for natural gas emerge, the price is expected to rise. But with the global emergence of tight gas exploration and development, the price of gas should continue to create a containing effect on the price of crude oil for some time.

Natural gas is increasingly being used in place of coal in electrical power plants in North America, as the price of gas has dropped to very competitive levels against coal. But globally, coal remains very popular, and North American coal companies have no problem finding overseas buyers for their product.

Bonus: Here is a speculative look at why the Saudis are flooding the markets with oil:
The economy. Saudi Arabia recognizes that lower prices in 1999 were a great helping solving the Asian debt crisis.

Russia: The Saudis are very upset with the situation in Syria. Lower oil prices will convince Putin to cooperate.

Iran: Lower oil prices will increase pressure on Iran.

Canada and the US: Lower prices will slow development of shale oil and tar sands.

Conservation: lower price might just slow the move of the US to efficiency. (might)

G20: Saudi Arabia likes to be considered part of the club. Lower prices would help renew their membership. _FT

Some of the above reasons for Saudi actions are probably true. Certainly the Saudis can punish Russia for misbehaving, given the Kremlin's excruciating dependency on energy exports to keep the domestic peace.

What is the likely near term future of energy prices? Here is one viewpoint:
Given that natural gas prices, outside the US will fall, coal prices are set to at best stagnate or decline, and renewable energy prices are in some cases on a steep downward slope - while global energy demand is set to grow at slower and slower rates - the potential for oil shock is low. Another oil panic is of low credibility, outside purely political driven oil crisis in the Middle East or possibly Africa. _MarketOracle
One hears such talk more and more from persons who not so long ago were shouting about the coming oil shocks or energy shocks. It is amazing how people's minds can be changed by brute facts hitting them in the face.

Peak oil doomers of the religious variety will not give in, however, no matter what. As well they should not, since people need to be true to themselves. As long as they are not so stupid as to make monetary bets on their religious beliefs, they should get along just fine.

And in the background are the lefty-Luddite green dieoff energy starvationists, working overtime to shut down coal, offshore oil, shale fracking, arctic energy, nuclear energy, and any other form of reliable, abundant, and affordable energy that may exist.

But we hope that in the US, such vermin can be largely cleaned out of government in November.

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