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Energy Markets Watch: “Letters” to Santa Edition

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

The easiest theme for any December Energy Markets Watch is typically Christmas or something generically holiday related. But, real talk here, the particular news items that have emerged this month don’t exactly scream peace on Earth or goodwill toward men.  However, a quick glance below does show a plenty of letters – G20, OPEC, US, UK, EU, LNG and the FED – that may or may not be headed to the North Pole. And really, that’s about as close as we can get to the holiday spirit this month.

Let’s take a quick look at a few of the folks likely to make energy markets either naughty or nice this month.  

December 6 – 175th Official OPEC Meeting

Originally scheduled for December 3, OPEC delayed its highly anticipated Vienna meeting to avoid overlapping with G20 meetings in Argentina. Beyond racking up some serious frequent flyer miles, the back-to-back geopolitical summits should give key players from Saudi Arabia, Russia and similar countries plenty of time to discuss their next move.

It also comes at a particularly precarious time for the global oil market. Saudi Arabia and Russia previously boosted production near all-time highs in response to fears that U.S. sanctions against Iranian oil exports would leave the market dangerously short on supply. The strategy made sense until the U.S. issued a series of last-minute 180-day waivers to a “who’s who” of Iranian oil importers. Now, fears of an undersupplied market have shifted to a market clearly suffering from oversupply, and Brent crude prices have responded by plunging roughly 30%.

Given the circumstances, it’s easy to see why Saudi Arabia – OPEC’s de facto leader – has championed calls for renewed production cuts to curb global supply.  While that would achieve the near-term goal of returning prices higher, it would also mean ceding more market share to American shale producers that have already vaulted the U.S. to the top spot among oil-producing countries.  Add in some hesitation from Russia, a few targeted Trump tweets, and an increasingly hostile diplomatic environment, and a simple decision to cut production isn’t simple at all if you’re Saudi Arabia.

December 11 – UK Parliament Votes on Brexit Terms

In any normal month, a G20 summit and a major OPEC meeting would tower over every other item on the geopolitical calendar. But this is not a normal month. On December 11, the UK parliament will vote on the terms of a Brexit deal negotiated between Prime Minister Theresa May and EU leaders. Based on reactions so far, many seem to agree that they don’t care for the current terms. Problem is, they don’t appear to agree on much else, and there is little consensus for any viable alternative. Additionally, with the EU already voting their approval for the deal, EU leaders have warned they will not return to the negotiating table. That suggests the only real alternative to confirming the deal on the table may be a “hard Brexit,” which would have major implications for currency markets and energy trade throughout Europe.

December 19 – U.S. Federal Reserve Decision

Traditionally, presidents have been hesitant to directly criticize or attempt to influence the Federal Reserve, But Donald Trump is not a traditional president.  With Fed Chair, Jerome Powell, continuing to lift interest rates, Trump has appeared less than satisfied with his pick to replace former Chair, Janet Yellen. That dynamic has set up a bit of a showdown in December: the Federal Reserve will announce its final interest rate decision of 2018. So far, despite Trump’s preferred path, the market expects Powell & Co. to boost rates by another 25 basis points, but uncertainty surrounding the move has been on the rise.

With interest rate speculation already triggering major stock market swings, it’s important to keep in mind that interest rate impact goes well beyond the S&P 500. For energy, interest rates have major implications for crude prices, energy bond yields and LNG flows, just to name a few. While markets have already worked to price in the strong likelihood of a December hike, they’ll be paying hyper-close attention to any signal on what to expect for 2019. Any shift could trigger a significant move for energy market prices.

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