ENERGY FUTURES AMID NEW ECONOMIC REALITIES
If there was a crystal ball, it would definitely be found in the offices of futures traders. In the absence of a crystal ball, traders rely on news, reports, strategy and a fair amount of good luck to make money. **
By Atique Naqvi, aka Syed Atique Hussain, Boston, United States
From political events to evolving business equations and, of course, demand and supply mechanisms decide the energy futures market in 2018. While the oil prices are witnessing an upswing in early 2018 from the sluggish price levels in 2015, 2016 and 2017, the global energy commodities’ futures market looks positive for now.
Before looking into the impact on energy futures in 2018, there is a need to clarify some basic concepts. Futures are standardized contracts for the future delivery of specified assets, according to Tim Plaehn, a US-based financial expert who writes advisory notes for several financial market platforms.
One of the largest exchanges for futures, also referred as derivatives, by volume is the CME Group of the United States, which include Chicago Mercantile Exchange, Chicago Board of Trade and New York Mercantile Exchange and Commodity Exchange. Futures are traded as contracts either over-the-counter or on an exchange. The other key futures exchanges are National Stock Exchange of India, Intercontinental Exchange in the US, Moscow Exchange, Eurex (Europe) and Shanghai Futures Exchange.
Types of futures include agricultural products, energy products, precious metals, interest-rate products and stock market indexes, Plaehn writes, adding: “The buyer of a futures contract is entitled to receive the contracted amount of the asset – such as 1,000 barrels of crude oil – on a specific date.
The seller of a futures contract is obligated to deliver that asset. Contracts trade on futures exchanges, allowing traders to buy and sell to profit from changing values of the assets. The active trading of futures is important in the price discovery of many types of assets.”
Also, futures have options that could be narrowed down to cash-out option. “A cash settlement is a settlement method used in certain futures and options contracts where, upon expiration or exercise, the seller of the financial instrument does not deliver the actual underlying asset but instead transfers the associated cash position,” says an investment advisory aggregator.
“For sellers not wishing to take actual possession of the underlying cash commodity, a cash settlement is a more convenient method of transacting futures and options contracts.” For example, the purchaser of a cash-settled oil or gas futures contract is required to pay the difference between the spot price of oil or gas and the futures price, rather than having to take ownership of physical delivery of oil and gas.
For the energy futures, outlook of the sector is very important. John England, oil and gas leader at international consulting firm Deloitte, summed up his take on the energy sector in 2018 in a note to media. The commodities futures market heavily relies on predictions, whether political and economic, and it also carries a significant amount of risk owing to the unpredictable events such as natural disaster, terrorist activities or armed conflicts.
“As we are midway through the fourth full year of the crude oil downturn, it seems like the right time for some big-picture reflection on where we are as an oil and gas industry. It’s been an interesting 2017 as the news cycle has been dominated by politics, natural disasters, and tense geopolitical challenges; also, the oil market is still challenged by high stocks and sluggish prices.
“From an energy perspective, we were busy watching: a) OPEC extend its cuts and adhere to them, b) US producers increase production and keep costs down, and c) demand increase enough to give us hope but not yet enough to really move the needle.”
One of the interesting things pointed by England is that OPEC may be running out of cards with its production output increase-decrease strategy.
“As long as I’m talking about cards, OPEC still seems to be playing with the same hand. The production cuts announced last year, in coordination with Russia, which were then extended six additional months, seem to have helped start a re-balancing of the market. However, although prices have recently moved up above the mid-$50 per barrel range [Brent Crude: US$69 per barrel on January 18, 2018], slow demand growth coupled with supply increases in the United States, Brazil, Iran, Libya, and Nigeria have, as yet, limited the pace of a return to market equilibrium,” says John England from Deloitte.
“At the end of November [2017], it was announced that the current level of cuts would be extended another nine months to the end of 2018, with Libya and Nigeria adding a promise not to raise their production; but, at some point, the market still needs a real demand boost to get prices moving upward in a meaningful way. Unfortunately, right now it’s not clear if that card is still in the deck. Barring that, only a supply shock is likely to move the market significantly, and that’s not really how we want to re-balance the market.
“OPEC’s role will likely continue to be a very important one for many years to come, but the rise of US tight oil has certainly changed the playing field and will likely continue to do so for the foreseeable future,” says England.
On the natural gas front, the Deloitte analyst says: “The rise of natural gas demand continued during 2017, but it was overshadowed by continued low-cost supply growth from a number of regions, such as the United States, causing global pricing to remain relatively low. The impact of US LNG exports (both current and expected) on the global market has been significant and has helped quickly turn a seller’s market into a buyer’s market.
“While the long-term growth of natural gas and LNG still seems likely, the economics of investment in LNG is more challenging than ever as long-term oil-linked contracts are replaced by shorter ones, based on a variety of natural gas indices, as buyers exert more leverage in the market,” says England.
KEY FACTORS AFFECTING ENERGY FUTURES IN 2018
Energy analysts have identified three major components that will affect energy futures markets, and the three major components have several expected and unexpected scenarios that are bound to affect the movement of the market.
1. Supply: US supply from shale growing again after recent years of glut. More cost-efficient production from shale. OPEC production reduction. Concerns of over political tensions in the Middle East. Results of the federal investigation in the United States over the alleged Russian role in the past US elections. Relations between Russia and Western Europe. Tensions among North Korea, South Korea, the United States and Japan. Bilateral and multilateral energy agreements that include new oil and gas pipelines, exploration and improved refining capacities. New oil and gas contracts in Iraq and Iran.
2. Demand: Global demand growth manageable. Energy efficiency and the rise in fossil fuel alternatives. Increasing US energy exports owing to the conventional energy-friendly government of President Trump. New economic policies in countries that have elections in 2018. Economic growth in major energy consumers such as China, the United States, India, and Russia.
3. Volatility: Enhanced by futures market as oil prices rise in 2018 and gas prices fluctuate. Adoption of the blockchain currencies in the energy futures. Being an election year in several nations, there might be an increase or a decrease in government energy subsidies, depending on countries. US President Trump’s role in scuttling Iran nuclear deal. Tensions among Iran, Saudi Arabia, Qatar and the UAE. The strength of US dollar, Fed rate, monetary tightening and tax reform.
** This article first appeared in Unisol magazine (Essel Group Middle East) published by Mediaquest Corp, Dubai, UAE.
By Atique Naqvi, aka Syed Atique Hussain, Boston, United States
 |
| Energy futures fluctuations help investors make or lose money. It's a game played in big volumes. |
From political events to evolving business equations and, of course, demand and supply mechanisms decide the energy futures market in 2018. While the oil prices are witnessing an upswing in early 2018 from the sluggish price levels in 2015, 2016 and 2017, the global energy commodities’ futures market looks positive for now.
Before looking into the impact on energy futures in 2018, there is a need to clarify some basic concepts. Futures are standardized contracts for the future delivery of specified assets, according to Tim Plaehn, a US-based financial expert who writes advisory notes for several financial market platforms.
One of the largest exchanges for futures, also referred as derivatives, by volume is the CME Group of the United States, which include Chicago Mercantile Exchange, Chicago Board of Trade and New York Mercantile Exchange and Commodity Exchange. Futures are traded as contracts either over-the-counter or on an exchange. The other key futures exchanges are National Stock Exchange of India, Intercontinental Exchange in the US, Moscow Exchange, Eurex (Europe) and Shanghai Futures Exchange.
Types of futures include agricultural products, energy products, precious metals, interest-rate products and stock market indexes, Plaehn writes, adding: “The buyer of a futures contract is entitled to receive the contracted amount of the asset – such as 1,000 barrels of crude oil – on a specific date.
The seller of a futures contract is obligated to deliver that asset. Contracts trade on futures exchanges, allowing traders to buy and sell to profit from changing values of the assets. The active trading of futures is important in the price discovery of many types of assets.”
Also, futures have options that could be narrowed down to cash-out option. “A cash settlement is a settlement method used in certain futures and options contracts where, upon expiration or exercise, the seller of the financial instrument does not deliver the actual underlying asset but instead transfers the associated cash position,” says an investment advisory aggregator.
“For sellers not wishing to take actual possession of the underlying cash commodity, a cash settlement is a more convenient method of transacting futures and options contracts.” For example, the purchaser of a cash-settled oil or gas futures contract is required to pay the difference between the spot price of oil or gas and the futures price, rather than having to take ownership of physical delivery of oil and gas.
For the energy futures, outlook of the sector is very important. John England, oil and gas leader at international consulting firm Deloitte, summed up his take on the energy sector in 2018 in a note to media. The commodities futures market heavily relies on predictions, whether political and economic, and it also carries a significant amount of risk owing to the unpredictable events such as natural disaster, terrorist activities or armed conflicts.
“As we are midway through the fourth full year of the crude oil downturn, it seems like the right time for some big-picture reflection on where we are as an oil and gas industry. It’s been an interesting 2017 as the news cycle has been dominated by politics, natural disasters, and tense geopolitical challenges; also, the oil market is still challenged by high stocks and sluggish prices.
“From an energy perspective, we were busy watching: a) OPEC extend its cuts and adhere to them, b) US producers increase production and keep costs down, and c) demand increase enough to give us hope but not yet enough to really move the needle.”
One of the interesting things pointed by England is that OPEC may be running out of cards with its production output increase-decrease strategy.
“As long as I’m talking about cards, OPEC still seems to be playing with the same hand. The production cuts announced last year, in coordination with Russia, which were then extended six additional months, seem to have helped start a re-balancing of the market. However, although prices have recently moved up above the mid-$50 per barrel range [Brent Crude: US$69 per barrel on January 18, 2018], slow demand growth coupled with supply increases in the United States, Brazil, Iran, Libya, and Nigeria have, as yet, limited the pace of a return to market equilibrium,” says John England from Deloitte.
“At the end of November [2017], it was announced that the current level of cuts would be extended another nine months to the end of 2018, with Libya and Nigeria adding a promise not to raise their production; but, at some point, the market still needs a real demand boost to get prices moving upward in a meaningful way. Unfortunately, right now it’s not clear if that card is still in the deck. Barring that, only a supply shock is likely to move the market significantly, and that’s not really how we want to re-balance the market.
“OPEC’s role will likely continue to be a very important one for many years to come, but the rise of US tight oil has certainly changed the playing field and will likely continue to do so for the foreseeable future,” says England.
 |
| Supply, demand, and volatility drive futures markets. |
On the natural gas front, the Deloitte analyst says: “The rise of natural gas demand continued during 2017, but it was overshadowed by continued low-cost supply growth from a number of regions, such as the United States, causing global pricing to remain relatively low. The impact of US LNG exports (both current and expected) on the global market has been significant and has helped quickly turn a seller’s market into a buyer’s market.
“While the long-term growth of natural gas and LNG still seems likely, the economics of investment in LNG is more challenging than ever as long-term oil-linked contracts are replaced by shorter ones, based on a variety of natural gas indices, as buyers exert more leverage in the market,” says England.
KEY FACTORS AFFECTING ENERGY FUTURES IN 2018
Energy analysts have identified three major components that will affect energy futures markets, and the three major components have several expected and unexpected scenarios that are bound to affect the movement of the market.
1. Supply: US supply from shale growing again after recent years of glut. More cost-efficient production from shale. OPEC production reduction. Concerns of over political tensions in the Middle East. Results of the federal investigation in the United States over the alleged Russian role in the past US elections. Relations between Russia and Western Europe. Tensions among North Korea, South Korea, the United States and Japan. Bilateral and multilateral energy agreements that include new oil and gas pipelines, exploration and improved refining capacities. New oil and gas contracts in Iraq and Iran.
2. Demand: Global demand growth manageable. Energy efficiency and the rise in fossil fuel alternatives. Increasing US energy exports owing to the conventional energy-friendly government of President Trump. New economic policies in countries that have elections in 2018. Economic growth in major energy consumers such as China, the United States, India, and Russia.
3. Volatility: Enhanced by futures market as oil prices rise in 2018 and gas prices fluctuate. Adoption of the blockchain currencies in the energy futures. Being an election year in several nations, there might be an increase or a decrease in government energy subsidies, depending on countries. US President Trump’s role in scuttling Iran nuclear deal. Tensions among Iran, Saudi Arabia, Qatar and the UAE. The strength of US dollar, Fed rate, monetary tightening and tax reform.
** This article first appeared in Unisol magazine (Essel Group Middle East) published by Mediaquest Corp, Dubai, UAE.
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