Energy futures markets are in a time of change. Market fundamentals have much to offer both bulls and bears. Technical analysis offers a methodology with which to evaluate the implications of fundamental change and it can provide guidance on where prices might go.
Here we will focus on the fundamental elements now influencing markets and the various technical factors that signal market movements. And since liquid petroleum markets have different fundamentals at work than do natural gas, we’ll have something to say about each.
Historically, petroleum liquids have been seen as critically sensitive to international geopolitical events. Constrained crude oil production in Iraq, for example, could influence product prices here at home. At the same time, the United States, and more broadly, North America is developing new crude oil sources that are insulating our markets from international events.
Natural gas, on the other hand, has been treated largely as a domestic matter removed from the uncertainties of international influences. But the lure of higher values for LNG in foreign markets is raising the real prospect of a robust export trade in natural gas – and must be considered when thinking about bearish expectations that have developed from the dramatic expansion of domestic natural gas production.
Market fundamentals for petroleum liquids are mixed. Without doubt, the game changer for the foreseeable future is the advent of domestic crude oil production. Data available from the Energy Information Administration (EIA) for mid-August 2013 confirms increasing U.S. crude oil production. Output reached 7.571 million barrels daily at that time; the gain came from the lower 48 states, offsetting reductions from fields in Alaska.
The reduction in Alaskan production has largely been ignored in our new successes in the contiguous 48 states. Alaskan output ran 456,000 barrels daily during mid-August, continuing long-term slippage from more than 1 million barrels daily in October, 2003. EIA forecasts U.S. total crude oil production will average 7.4 million barrels per day in 2013 and 8.2 million barrels daily in 2014. These represent increases in EIA’s expectations.
The impact of domestic crude oil self-sufficiency has been more expansive than generally reported. One example is the improvement in our trade deficit. “America's trade deficit narrowed sharply in June, driven by record exports and a shrinking bill for oil imports, brightening the picture for domestic growth in the second quarter,” according to the Wall Street Journal. The trade deficit fell more than 22% during the month, to $34.2 billion from $44.1 billion.
Anticipation of tapering of the Federal Reserve’s low interest Quantitative Easing has been bearish. Ironically, Fed action appears now to have become entrenched in the economy and any change in the status quo has roiled energy markets. One of the major discussions now underway relates to how best to disengage from the impact of the Fed’s QE activity.
The bearish crude oil situation in North America mitigates bullish events overseas. Interference with crude oil production and export in the Middle East and North Africa (MENA) supports price.
At this writing, the geopolitical news revolves around Syria. The country has little production of its own and, in any case, economic sanctions and unrest in the country have cut into any export capability it may have had. More importantly, Syria is near pipelines and the Suez Canal that carry a great deal of crude oil. The EIA estimates that the Suez Canal carries about 800,000 barrels of crude oil and 1.4 million barrels of products daily.
Turkey, just to the north of Syria, houses the Kirkuk-Ceyhan pipeline, which carries Iraqi crude oil to the Mediterranean Sea. It also supports the Baku-Tblisi-Ceyhan route from Central Asia. Iraq, with its Northern Iraqi fields, produced three million barrels daily last year. Iraq is just to Syria’s east.
A point so central to Middle East oil distribution would be critical to crude oil security at any time. With events so fraught, the potential for disturbance is much greater.
The Arab Spring unleashed emotions and conflicts not yet resolved. Export capacity in Libya has been constrained and backed up crude oil production. There have been actual interferences already in distribution. Kirkuk-Ceyhan has been attacked; 300,000 barrels daily flow has already been reduced to a trickle. And revenue disputes between the regional government and Baghdad have cut supply from Kurdistan by 15,000 barrels per day.