The Weekly Report: A Look At Energy In 2011 (Part I)

20 December 2011

2011 has been described as ‘momentous’ by no less an authoritative source than Platts — not particularly known for superlative or exaggerated language.

Political unrest, rapidly shifting supply and demand dynamics, and global macroeconomic uncertainty have led to very interesting and often unforeseen events in global energy markets this year. Locally, there have also been a number of key developments that could impact the overall trajectory of the industry — and by extension, the nation — going forward.

This blog post is the first of a series which over the next week will look at events in the global and Trinidadian energy sector for general enlightenment and entertainment, but also with insights on how investors can gain perspective going into 2012. We will also let you know more about Firstline investment products and services that allow investors to participate in the global and local energy sector.

Two events — one manmade, the other a devastating natural disaster — had an impact on the markets from the onset of the year. A desperate act of protest by one man in Tunisia galvanized citizens across the Arab world, leading to the ouster of seemingly invincible strongmen such as Hosni Mubarak and Muammar Gaddafi.

The (ongoing?) civil conflict in Libya in particular had a profound impact on energy markets, as the vast majority of Libya’s 1.6 million barrels of daily production were removed from the market. The effect of this was especially felt in Europe, which is the primary end market for Libyan crude and refined products. To put this in perspective, Libya is Africa’s largest holder of crude oil reserves with over 46 billion barrels, and is the closest large oil exporter to Europe after Russia as it is a major supplier to 4 of the G-8 countries (Germany, Italy, the UK and France).

Libyan crude oil exports by country, 2010.

The Libyan supply displacement is just one major reason why the spread (or difference) between Brent (European) and WTI (American) oil prices flirted with $30 levels.

Year to Date chart, Spread between WTI and Brent light crude oil prices.

As seen on the chart, the spread widened from USD 5.00, which was at the higher end of historical averages, to an unprecedented historical record of USD 29.59 on September 23, 2011, breaking several records along the way. The 5 year chart is included below for comparative purposes:

5 year chart, Spread between WTI and Brent light crude oil prices.

The difference was so stark, and supply shock so severe, that several high level members of the International Energy Agency found it necessary to release a portion of strategic oil reserves, which are usually used only during times of war and extreme hardship. The Brent WTI spread is decreasing, in part due to macroeconomic uncertainty in Europe, and a secular softening demand picture on the continent. Nevertheless, it is still higher than historical averages, and if any major geopolitical events occur we could see it revisit some of its previous highs.

The earthquake and tsunami in Japan claimed many lives, and caused massive economic disruption globally due to Japan’s key role in the industrial supply chain.

As far as the energy picture goes, it may signify a major bump in the road for nuclear power, which many advocates were beginning to tout as a potential ‘clean’ alternative in the transition away from dirtier fossil fuels. Since the fallout from that catastrophe, Japan has embarked on a very aggressive shift away from nuclear, importing increasingly large shipments of natural gas and coal. This policy put even more pressure on already tight Asian demand, due to a concentration of resilient growing economies in that region.

T&T exports to Kansai Electric, a major electric utility in Japan.

Trinidad & Tobago has been a beneficiary of this, as LNG exports to at least one buyer in Japan increased from around 58,000 metric tons to more than 200,000 metric tons between January and August 2011 according to Platts. This is a significant but increasingly common deviation for T&T, which up to two years ago exported the vast majority of its gas to the US.

LNG prices in Japan were in the mid-teens for most of the year, while US natural gas prices at the Henry Hub in Louisiana found it difficult to stay above $4 per mmBtu (T&T’s LNG exports to the US are tied to the Henry Hub price). This huge price differential is likely to persist into the next year as Asian demand continues to be very high, while US supply and inventory levels are persistently elevated.

Ultimately, the combination of higher natural gas prices in Asia, along with increasing T&T exports to that region and Latin America, should bode well for the T&T economy—as well as the producers and service companies who are active here.

Firstline Oil Notes Ltd, a structured product, is well positioned to benefit from this increase in export activity, and in addition to its excellent yield in both USD and TTD, is a great, low risk, low volatility way for investors to gain exposure to the energy markets.

If you want to find out more about our Oil Notes, send me an email or give the office a call @ 628-1175.

Michael J. Cooper
Trading & Strategy Consultant

Comments are closed.