Energy Market Watch: September 2016

September 7, 2016 Allison Schweizer

Energy Market Watch: September 2016

(American) football season is here and the Denver Bronco’s title isn’t the only thing up in the air.

There is a lot of action and activity that could impact the energy and financial markets this month. It’s looking like they’ll need a strong offensive line to protect them… from hurricanes. And, no, we’re not talking about Hurricane Miller. Here are some key dates and details to watch:

Sept. 10: Peak Hurricane Season

The Atlantic hurricane season technically runs from May until November, but a quick look at the data shows September is, unfortunately, in a league of its own – Sept. 10 in particular.

Over the past 100 years, the Atlantic Basin witnessed roughly 100 hurricanes and tropical storms on that day alone. After that, the odds fall relatively quickly, with fewer than 50 storms recorded for most of October.

While only a fraction of these events represent wide-scale natural disasters, even minor systems are capable of impacting the energy sector. This is especially true for tropical storms and hurricanes affecting the Gulf of Mexico and the greater Gulf Coast region. The Gulf Coast is responsible for a substantial portion of the country’s oil and gas production, processing, refining, and import and exports. As a result, weather events in the Gulf have a clear path to affect not only energy costs in the U.S., but in extreme cases, the entire global energy market.

Sept. 21: Federal Reserve Meeting and Press Conference

The Federal Reserve seems have a permanent spot on the monthly calendar, but it certainly earns the space. After years of unflinchingly low interest rates, the Fed made its first official move in December to raise rates as part of a broader “liftoff” policy.  Markets responded less than enthusiastically, with most stock market indices falling in February and oil prices crashing into $20 per barrel. Since then, despite a heavy dose of Brexit-based anxiety in June, prices appear to have regained footing, with the oil prices and the S&P respectively charting annual or all-time highs.

Fast forward to today and that investor confidence, alongside some healthy employment numbers, has the Fed feeling a bit more empowered.  Based on futures trading, the market currently sees a 1-in-4 chance of a second rate hike in September. Not a done deal, but a long way from “virtually impossible” territory seen only a few months earlier. If Janet Yellen and crew decide the market can handle another hike, expect a stronger dollar and a general discount for the world’s dollar-denominated energy commodities. Looking at you coal and crude oil.

Sept. 26-28: OPEC meets in Algeria

The Federal Reserve isn’t the only major organization dishing up some déjà vu to the global economy. Just before the close of the month, OPEC members plan to hold an “informal” meeting in member-country Algeria — with potential attendance by certain key non-OPEC producers as well. According to a number of sources, the primary agenda item is a possible output cap or production freeze that would theoretically cap the cartel members’ oil production at current levels.

An Oil & Gas Industry drilling rig is surrounded by portable housing units and equipment in support of the drilling of an exploration oil well in the Sahara Desert, Algeria, Africa. Sand dunes, sparce vegetation and a clear afternoon sky make up background and foreground.If this sounds familiar, it should. It’s essential the same context for the OPEC summit in March/April. In that instance, the only freeze came in the form of a cold shoulder offered by Iran to regional rival (and de facto OPEC leader) Saudi Arabia. Iran ultimately refused to attend the freeze talks earlier in the year and considering Iran’s role as one of the few countries in OPEC even capable of increasing production above current levels, their non-participation essentially killed the deal.

In this latest edition, Iran says it will be in attendance, but until the Iranian delegation touches down in Algiers, their participation is less than guaranteed. At the same time, a freeze will need the participation of Libya and Iraq, two countries with few incentives to cap production and plenty to keep producing. As a result, expect a repeat of last round’s conclusion: heavy speculation, but little or no movement.

Sept. 27: DC Court of Appeals Hears CPP Arguments

In the North American energy industry, one could argue that the Clean Power Plan (CPP) will be about as transformational as the shale boom… if it’s upheld.  The D.C. Circuit Court of Appeals, one step below the U.S. Supreme Court, is going to hear arguments on the “State of West Virginia et al vs. the Environmental Protection Agency (EPA)” case. Originally scheduled for a spring hearing with three judges, the D.C. court chose to hear the case en banc — i.e., with the full bench. This decision is important because the Supreme Court is currently split with four judges for and four judges against the constitutionality of the EPA’s authority for the CPP. The ruling of the nine D.C. judges hearing the case may therefore become the final law of the land. According to the sitting judges’ voting records, it is likely that the court will decide 5-4 in favor of the EPA, making the CPP law.

The CPP is the first policy mandating that states reduce electricity sector carbon emissions, specifically targeting existing coal plants. If the CPP is upheld by the courts, states will be required to submit plans on how to meet compliance requirements for the 2022 and 2030 deadlines.

Regardless of the outcome, the presidential election in November may have an even broader impact on the EPA’s authority, its reach and future carbon policy. A Republican president would likely reduce the authority of the EPA, limiting the impact of the CPP and other regulations, while a Democratic president would likely expand carbon-focused policy and speed up the retirement process for coal plants.

September is a busy and potentially volatile. But, hey, the energy and financial markets made it out of August unscathed. So the status quo may remain.

Check back next month for more dates and insights.

The post Energy Market Watch: September 2016 appeared first on Schneider Electric.

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