Energy Market Watch: Goooaal! Edition

July 13, 2018 Chad Holder

Energy Market Watch: Goooaal! Edition (July 2018)

Contributed By: Robbie Fraser, Commodity Analyst | Schneider Electric Energy & Sustainability Services

The July Market Watch arrives just in time for the final kick off of the 2018 World Cup in Russia. Not coincidentally, our energy market news and notes are filled with plenty of pushing, shoving, cursing and faking injuries. And that’s just from the NATO Summit.

So, before the final whistle sounds on July, take some extra time to read up on this month’s turmoil, trades and tariffs and – of course – expect some penalties.

July 13 – Trump in the UK

Brexit flagDonald Trump will make his long-anticipated arrival in the UK at a time when it faces plenty of political turmoil on the domestic front. In recent weeks, several high-profile cabinet resignations have challenged Prime Minister Theresa May. Those resignations were an act of protest by the more conservative wing of May’s conservative ruling coalition. Tension continues to swirl around a “hard Brexit” – favored by party hardliners – or a more moderate “soft Brexit” approach that would seek to maintain certain economic ties to the EU in exchange for other concessions. While President Trump isn’t likely to have much say about UK internal affairs, his arrival is likely to amplify an already politically charged climate.

Ultimately, Brexit is inherently intertwined with energy market dynamics. The UK trades gas and power with its EU neighbors daily, and it continues to operate within the same European carbon market. That energy interdependence suggests any Brexit scenario will keep those ties intact, but energy markets are certain to pay close attention.

July 15 – World Cup Final

The World Cup has a way of bringing the world together in a unique way. After all, soccer is the world’s game and the World Cup is undoubtedly its pinnacle. As we’ve seen in previous editions, it can also have unique impacts on energy. Unlike the Olympics, the World Cup plays its Golden cleatsmatches across several cities in its host country. The widespread surge in energy demand can be difficult for a power grid to manage. In, 2014, in fact, host Brazil had to boost coal and natural gas production to supplement its usual hydro-heavy grid.

But the impact extends well beyond the host nation as electricity demand surges around the world in the form of increased TV viewing. That can often lead to blackouts and, given the stakes, those blackouts can lead to riots or major swings in political polls. That’s not just the case for developing markets (exhibit A), but some of the world’s most established power markets, as well. It is an excellent reminder that grid reliability remains a delicate balance no matter the market. 

July 15 – Chinese GDP Data

Modern economic thought is nearly uniform in its view of full-blown trade wars: there are few winners.  However, that doesn’t mean everyone responds to trade barriers in the same way. In the U.S., early trade policy changes under the Trump administration already point to some clear winners and losers. U.S. steel manufacturers cheer tariffs on imports while U.S. soybean farmers confront lower prices because of retaliatory measures by foreign markets.

Within the broader trade conversation, though, China stands out. China and the U.S. share a massive commitment to bilateral trade – as in $500,000,000,000+ in trade just last year – so any barriers to trade between the two can have global economic consequences. This comes as the Chinese economy continues rapid expansion while working to transition from an emerging industrial economy to more of services-focused, consumer economy like the U.S.

chinese GDPThose types of fundamental shifts don’t come cheap. The level of Chinese debt in certain sectors has some economists worried that a certain catalyst (i.e., trade war between the world’s top two economies) could burst some bubbles. Maybe so, but various pundits have been ringing alarm bells on the Chinese economy for years – all while Chinese GDP has grown at more 2-3x the rate of U.S. and EU economies each year.

The conclusion: the data (hopefully) doesn’t lie. If Chinese economic figures hold steady, energy and equity markets alike should remain cautiously optimistic. However, if Chinese economic data does start to flash real warning signs, it’s hard to understate the impact for all things energy. If the Chinese economy starts to go down, it’ll likely take crude, coal, and everything else with it.

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