The Energy Report for Tuesday, March 16, 2011


Trying to Find Signs of Hope


As Japan struggles to bounce back from its horrific nightmare, the markets are trying to find a ray of hope. One day after global commodity and stock markets got crushed on reports of a second explosion at the Fukushima Daiichi nuclear power plant, some markets are struggling to look beyond the disaster. But then the evening news late yesterday reported that the plant was once again dealing with a fire. Late yesterday, as pointed out by Scott Ross, that even as grains, cotton, coffee, copper, silver, oil, gold plunged, commodity stocks like Shares of Freeport-McMoRan Copper & Gold Inc and Potash staged late day reversals signaling a time when the market will focus on the longer-term bullish aspects of this disaster as opposed to the near-term bearish implications. Still overall the market action seemed to suggest that if Japan loses control of their nuclear plants, the global ramifications could derail the global economic recovery. Do you think the Federal Reserve might have mentioned that in their statement? Despite the epic struggles, the Japanese stock market opened higher perhaps helped by the 15 trillion yen or 183 billion dollars that the Japanese central bank shot into the system. While that helped stocks, it hurt precious metals that sank on concerns that not only will investor and jewelry demand falter from Japan but the possibility that at some point the Japan central bank may sell gold reserves to raise capital for reconstruction. It is also possible that the International Monetary Fund, the third largest holder of gold reserves in the world, will be called on upon to help Japan battle back for what could turn out to be a disaster unlike any we have seen before. The markets are trying to assess the damage and look ahead but because of the struggle with a potential nuclear meltdown, there is fear that the true extent of the demand destruction may not be known for some time. If this was a normal earthquake and tsunami situation it is likely that the market would already be preparing for the rebuilding phase yet with the uncertainty surrounding all of Japan's nuclear plants means that it is impossible to gage exactly when this rebuilding will begin. Of course all of this seems to be lost on the Federal Reserve which failed to acknowledge or even mention the great threat that Japan poses for the global economy. Maybe if you don't have anything good to say perhaps you should not say anything at all. The Fed did say that, "Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued." They went on to say that they would be watching oil. "The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations." In other words, Fed policy may be dictated by how high oil goes. At least the International Energy Agency mentioned Japan. The IEA kept its outlook for global oil demand in 2011 pretty much unchanged, saying more time is needed to determine the impact from Japan's earthquake. Ok, it wasn't much of a statement but more than the Fed had to say. The IEA also said (which may be of interest to the Fed) that Libyan oil might be off the markets for months. They said that Saudi Arabia also created two new crude grades with a lower density and sulfur content to match the quality of lost Libyan oil shipments which may help relive the bottleneck at some European refineries. The IEA also said that Japan may consume an additional 200,000 barrels of crude a day if they look to crude based fuels to replace their lost nuclear output. Now add to that all the countries around the globe that will consume more oil as they back off of nuclear power. While the market has been focused on threats to the demand side there are still significant risks to the supply side. In Libya Gadhafi is making more headway and the risks are rising in the region as the Saudis have sent troops to Bahrain. Iran has blasted the Saudis saying they have no business in Bahrain. Iran backs the Shiite's against the more moderate Sunni's. To add to the concerns from the supply from Nigeria could be in doubt as reports of an oil pipeline blast may take off more high quality crude from the market place. Tensions are running high throughout the region and could cause a major price spike that could even be a threat to the economy as well as global economic policy around the globe. Make sure you are being kept up to date with all of the latest breaking developments by keeping tuned to the Fox Business Network!

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