Energy Markets Watch: International Intrigue Edition

May 14, 2019

Contributed By: Robbie Fraser, Commodity Analyst | Schneider Electric Energy & Sustainability Services

May’s Markets Watch arrives in an unmarked envelope taped under a nondescript park bench. It’s filled with news and notes on this month’s market movers along with half a dozen passports and the equivalent of $56 in several national currencies because, hey, Markets Watch is on a budget here. (If this sounds like a particularly bad spy novel, then Markets Watch will keep its day job for at least another month.) In the meantime, those passports may come in handy as Markets Watch spans the globe, from Russia to Venezuela, back to Germany, then over to the Middle East and finally back to the U.S. – all in a two-week span.

May 14: U.S. Secretary of State Mike Pompeo to Visit Russia

Any meeting between U.S. and Russian leaders has implications that go far beyond energy markets, but energy markets are closely intertwined with some of those more pressing topics.  That’s hardly surprising though, considering the U.S. and Russia represent the world’s top two producers of both crude oil and natural gas (with the U.S. recently taking the top spot on both).

Energy issues likely to make the agenda include:

  • Political instability in Venezuela
  • U.S. sanctions on Iranian oil exports
  • Russia’s continued progress on the Nord Stream II gas pipeline into Germany 

All three represent issues where the two energy power brokers are diametrically opposed, and all directly impact today’s gas and oil market expectations.

Ultimately, neither side is likely to persuade the other to change course. On the contrary, with the U.S. increasingly exporting crude products and LNG into markets where Russia has traditionally dominated market share, tension between the world’s two energy superpowers is likely here to stay.

May 14: OPEC Oil Market Report

Though Russia (and the EU, China and India) may openly disagree with the U.S.’s decision to pull out of the Joint Comprehensive Plan of Action (JCPOA) nuclear deal, the move has at least one vocal proponent: Saudi Arabia. The Saudis have long called for the U.S. to leave the landmark agreement, which has triggered strict sanctions on Iranian oil exports. Ultimately, Saudi cooperation is a key element of U.S. efforts to further restrict Iranian oil exports as Saudi Arabia has pledged to reverse recent production cuts and keep the market adequately supplied.

In theory, that allows the Trump administration to target Iran’s oil revenues while minimizing the corresponding pain at the pump in the U.S. For Saudi, concerns of lower prices from increased production are offset by a scenario where Saudi Arabia is positioned to seize Iran’s lost market share.

However, a very similar scenario started to unfold a year earlier. Saudi Arabian production rose too quickly sinking oil prices well below their desired levels. Wary of a repeat, look for Saudi to boost production gradually leaving room for prices to test recent highs. In measuring those efforts, OPEC’s Oil Market Report offers a valuable glimpse at members’ production, so rest assured global oil prices will be paying close attention.

May 30: U.S. Trade and GDP Data

Anyone who has followed markets since the Great Recession has heard thousands of claims of imminent recession, all of which (so far) have proven unfounded. That said, recent key indicators do indicate a rising recession risk ahead. Global growth is slowing, including in key emerging markets, and more complex metrics like bond yield spreads urge caution. That has global markets on edge, from bonds to equities to energy commodities. A recession would bite into energy demand and could quickly sink energy prices — from crude to natural gas to power commodity costs.

With that in mind, the imperfect (but nonetheless highly relevant) U.S. GDP data stands out as the most straightforward indicator. As long as U.S. GDP growth matches expectations, recession fears should be held in check. If numbers begin to disappoint, though, expect the bears to bring renewed pressure for global markets.

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