Energy Procurement: Market Update

Signs that some of the larger oil producers may be willing to play nice in the sand box triggered the crude oil roller coaster ride to blow back on the upside through $30 for WTI crude oil.

News that the Saudi’s & Russian’s agreed to cap output at current levels, and some favorable comments from the Iranian oil minister was enough to halt the recent slide sending WTI back above $30. Additional news of continued talks between other OPEC and NON OPEC countries, and an unexpected drop in US inventories fueled a follow-through of yesterday’s strength. WTI Crude is trading above $31 in early trading.

I don’t see anything to get excited about. An output freeze if adhered to would do little to address the current supply glut and I do not see any convincing signs that there will be any help from the demand side. I believe the market will continue to experience volatile swings around the $30 level.

The fact that OPEC and non OPEC producers are communicating is definitely a positive, however, actions speak louder than words, so I will need to see to believe and the market is in need of significantly more than production caps. But it would be a start.

Could this be the beginning of a bottoming process? Perhaps, but I would be looking for a grand finale of heavy selling to new lows before I buy into the possibility of a sustained recovery.

Regarding natural gas, it’s the same old-same old. The EIA reported a 158 Bcf withdrawal this morning for the week ending Feb. 12 which was slightly above expectations but below the 5 year average of 170 Bcf. The supply glut continues and as the winter winds down, the hopes of a weather related increase in demand are becoming less likely. Natural Gas inventories are now 2.706 Tcf vs. 2.17 Tcf last year and the 5 year average of 2.151 Tcf .

On the power side, last week’s severe cold snap had little effect on the D-A markets perhaps due to the it falling on the Presidents Day holiday weekend. Timing is everything! Contract renewal pricing continues to be favorable, and I would continue to favor shorter term hedges as I continue to expect a measurable drop during the shoulder demand period this coming spring. I strongly recommend being set up to pull the trigger on a long term lock when the time is right which will most likely be in the second quarter.