The Energy Report for Thursday, March 18, 2010

This week the Federal Reserve told us that the fed funds rate could stay exceptionally low because of subdued inflation trends, and stable inflation expectations. Of Course with a fed funds rate target rate just above zero and loads of recently printed money, how that is possible? Come on! The way to create inflation is to print more money. Heck that is almost the definition of inflation. Oh sure the Fed had to act to save the global economy but how could their actions not create inflation? Sure enough, if we go by yesterday's Producer Price Index, well by golly there is no inflation. In fact you might say we still have some disinflation going on. Believe it or not wholesale prices actually fell by 0.6% in February after the government factored in some seasonable adjustments. The reason for the astonishing drop in prices according to the government is that energy prices for producers fell a whopping 2.9%. That stunning drop (stunning if you've bought any gasoline lately) in energy prices obviously did not come just from falling oil prices, although we did see oil as low as 6950 to start the month. Oil prices rallied and have been very volatile yet where we really see the possibility and the promise of a more stable energy price is due to US natural gas producers' victory over US peak natural gas production.

New production of shale gas and new drilling techniques have helped US manufactures help anchor producers energy price expectations allowing them to produce goods more competitively and with less price risks. The stabilization of the market place has thereby saved jobs and allowed the Fed to keep their foot on the stimulus pedal while avoiding that dreaded inflation. Yet does the natural gas industry get the credit it deserves? I think not! In fact the US government is not encouraging natural gas and fractional drilling or embracing it as a major part of our energy policy. Of course the industry is still moving on quite successfully and will continue to do so if the government does not get in the way. Rig counts are rising and we are seeing an increase in bids on leases. The AP reported that the Mineral Management Service said that 67 companies submitted 642 bids on 468 tracts in the central Gulf of Mexico. Last year only attracted 476 bids on 348 tracts. This obviously covers oil and gas. The AP reported that the management service said more than half the tracts that received bids were for tracts in water depths greater than 1,300 feet, indicating the industry is still focused on deepwater drilling, a risk that involves hundreds of millions of dollars in investment and several years before it reaches market -- if producible quantities are found. And supplies are more than ample. Today we see what gas inventories look like. Last week according to the Department of Energy working gas in storage was 1,626 bcf which is 19 bcf above the 5-year average of 1,607 bcf. The expectations are for gas to fall by 28bcf.

There is more pressure on the Chinese to raise the value of their yuan as pegged to the dollar currency. The World Banks raised China's growth forecast but also warned them about the risks of rising real estate prices and concerns about some of their regional banks. The World Bank says that the renimbi or yuan is obviously undervalued. What may pressure oil today are reports about China checking with their exporters seeing if they can handle an increase in the Yuan's value. China is the world's second largest oil consumer and is also buying up more oil reserves for the future. Now India is starting to think that they should be doing the same thing. A bullish long-term development for oil. The Financial Times reports that, India is facing demands from the local state-owned oil industry to create the country's first sovereign wealth fund to compete with China in the race to secure global energy assets, according to government and industry officials. The discussions under way between the oil and finance ministries to set up a sovereign investment fund were at an early stage, the officials said, and no deadline had been set. The plan, if adopted, would repudiate an initiative pushed by New Delhi in 2006 for India to join forces with China in bidding on global energy projects to keep costs down. A must read in today's FT.

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