A plethora of reasons can cause energy market volatility; however, here are the top issues currently affecting the oil markets.
Sanctions against Iran have caused a lot of uncertainty with oil investors, and the possibility of a supply disruption puts even more fear into the equation.
Iran threatened to shut down the Straits of Hormuz, through which roughly 33 percent of the world’s oil passes. Fortunately, Iran has entered into constructive multilateral discussions over its nuclear program which will continue this month.
Political instability is the overarching problem when dealing with Middle Eastern suppliers.
The Seaway pipeline, a 500-mile pipeline carrying crude oil from Freeport, Texas, to Cushing, Okla., will come online May 17. Cushing is the pricing point (benchmark) for oil traded on the NYMEX.
This pipeline will help ease the bottleneck of oil caused by the lack of transportation between the middle part of the U.S. and the Gulf Coast. This excess of oil is partially responsible for oil prices being so cheap compared to international prices.
Once the owners announced the pipeline, early West Texas Intermediate (WTI) prices increased. The price difference or “spread” between WTI and European Brent oil narrowed.
Moreover, the relationship or “spread” between WTI vs. gasoline and WTI vs. diesel has narrowed. The markets already have the perception that inventories will be reduced, and as a result, we have witnessed increased oil prices.
Once we start seeing actual results, oil could go higher, but for now we will have to wait to see how much inventories will be affected.
The European debt crisis has been taunting us for more than two years. Spain is now taking Greece’s place in the headlines and threatens to re-ignite the crisis. Interest rates on Spanish debt are now above 6 percent, which most market analysts feel is unsustainable.
However, investors were eager to scoop up Spanish debt in April. So far, Spain is on track to correct the problem, but another debt crisis could send shockwaves through the financial and energy markets. The energy markets see any kind of crisis as bearish because fuel demand is in question when these types of issues arise.
The media grabbed everyone’s attention earlier this spring with $5 gasoline headlines, which seems unlikely (except for metropolitan areas).
Typically we peak out in early May when the driving season kicks off. Let’s see if typical seasonal patterns hold true again!
Brian Hartman is GROWMARK’s energy analyst. His e-mail address is firstname.lastname@example.org