Greetings from London.

North Dakota revels in record growth thanks to oil; no alleviation for natural gas price pain; Edison’s expensive nuclear decommissioning; a new record for global CO2 emissions; a hint about some interesting movement in the Mississippi Lime; and a sneak preview of what’s to come in this week’s premium newsletter…

Good news for the state of North Dakota, which tops the US charts for growth and daily oil production as figures are released for 2012, but bad news for natural gas prices, which analysts say look set for another downward climb.

Let’s start with the good news, if you’re from North Dakota. The US Commerce Department’s Bureau of Economic Analysis just came out with 2012 growth and oil production figures, and North Dakota is the clear leader with 13.4% growth last year, compared to only 1.7% overall growth for the US. According to the bureau, this is the highest growth rate in 25 years—thanks to booming oil production—and far beyond Texas’ growth rate of 4.8%. And there are no states in between these two. Check out this “charticle” from realclearenergy.org.

Now the painful news—natural gas prices. Late last week, natural gas futures started to take another beating with a gain in inventories that surpassed any weekly gains for four years as supplies rose by 111 billion cubic feet—a good 10-15 billion cubic feet more than expected and a good 40-50 billion cubic feet more than the previous week. Some analysts think this trend will continue for the immediate future.

But the big “upset” story this week—for those not lured away by the sexier news of the NSA’s digital surveillance reach—is the permanent closure of the San Onofre nuclear plant and the ensuing regulatory battle Edison International (EIX) will have to fight over who is going to foot the bill here. It will cost around $3.4 billion to retire the nuclear plant. The plant is owned by Southern California Edison, which has invested $2.1 billion in San Onofre’s two nuclear reactors, and now finds that it could end up paying $1.3 billion in refunds for customers who paid since the plant stopped producing power in January last year when the reactors were shut down after a radioactive leak was discovered.

The San Onofre story is the continuation of a story that began in earnest when the shale gas boom turned nuclear endeavors into economic nightmares. This year has seen the closure of four other commercial nuclear power units so far. Since then the idea of possibly restarting the reactors proved to come along with costs that wouldn’t be recouped and significant regulatory hurdles. Existing nuclear reactors are becoming increasingly too expensive to maintain, and questions of safety rise in tandem with costs that question commercial viability. But it’s not the beginning of the end for nuclear; it’s just the beginning of the beginning, and a future (still quite a long way off) where small modular reactors (SMRs) will take center stage.

In the meantime, we have apparently set a new record in global carbon dioxide emissions, according to the International Energy Agency (IEA). This week, the IEA released its figures for 2012, stating that global emissions of CO2 from energy use rose 1.4% to 31.6 gigatons last year—a record high. The energy sector accounts for more than two-thirds of greenhouse gas emissions, so “energy has a crucial role to play in tackling climate change,” the IEA said.


That’s it for this week. I hope you enjoy Dan’s report below and have a great weekend.

Kind regards,

James Stafford
Editor, Oilprice.com

Why is Oil So Strong in the Face of Almost Universally Weakening Markets?

The markets have looked a lot shakier in the past two weeks and that certainly applies to more than the bond and equity markets. As treasury rates have risen and bond prices have fallen, we’ve seen a massive deleveraging from the Japanese stock market that has hit currencies hard as well, particularly the Yen.

Whew – all of that has made a safe haven for investment hard to find and commodities have continued to suffer as well: Copper is reeling as is iron ore and most of the grains.

But not oil. Oil has managed to stay sticky in price with Brent remaining above $100 a barrel and West Texas Intermediate hovering close to $95 a barrel. How can oil stay so strong in the face of almost universally weakening markets?

The answer lies in two reasons unique to oil – and they are both financial and not fundamental in nature.

First is the Brent oil market, which has become the global benchmark for pricing. Brent crude is priced mostly upon North Seas crude, which has continued to experience a weakening supply profile: the production from the North Sea continues to disintegrate. And even though new supply from deep water and shale plays in the US augment the already increased supply from Saudi Arabia and Iraq, the financial connection to a small North Sea market with an inherent supply shortage continues to put upwards pressure on prices.

And while it would be far more useful for consumers to find a more logical financial benchmark for pricing global crude, don’t expect one to emerge any time soon. Competitive contracts to Brent and WTI crude have been tried several dozen times in the history of financial oil without success, and most of the oil trading world now accepts these two as the only legitimate benchmarks with which to basis the price of other, more local grades.

The second reason for oil’s stubborn high price is a concept I concentrated on in my book, “Oil’s Endless Bid”: The financialization of oil has turned crude into another asset class, much like stocks and bonds, that doesn’t react as easily to the fundamental inputs of supply and demand. And while almost all other asset classes have reacted negatively to bond rates and the Yen trade in the last two weeks, oil has seen relative strength in the same way that other tangible assets, like housing, have seen. Oil has become a ‘value repository’ in a way that even Gold has lacked and has managed to resist the weakening forces that other markets have recently succumbed to.

That’s why I continue to think that the risk to oil is on the upside and not on the down: Oil markets continue to make ‘higher lows’, with 2012 higher than 2011, which was higher than 2010. I don’t expect 2013 to be any different, and still maintain that even if oil remains in a range, it’s downside limit is somewhere in the mid $80’s for WTI.

And that makes for some interesting trading ideas, which I’ll discuss in my next column.

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