The Helicopter Has Landed
What do you mean no helicopter money? I had my bucket ready to go!
Oil prices gave up some oil inventory-inspired gains after Japan said there is no chance Japan will resort to “helicopter money” bonds. Darn, I already thought they had. This comes against a backdrop of a state of emergency in Turkey that is raising concerns that Turkey may actually start moving away from the West politically and getting closer to Russia, increasing the risk to Europe’s natural gas supply. Risks are rising, as crude supply is falling, as the oil market tested below the key $44.00 a barrel handle only to reject it and give us a good chance that a near term bottom is in.
Central banks and monetary policy continue to have a say and move markets. Yesterday it was stories that the Federal Reserve was seriously considering a September interest-rate hike, assuming of course you can take anything the Fed signals seriously. Today we see risk on mood turn to risk off after Bank of Japan Gov. Haruhiko Kuroda said according to reports that, “I don't think at this stage we should abandon this institutional setting. No need and no possibility for helicopter money. We have very powerful policy framework, and I don't think there's any significant limitation of further easing of monetary conditions in Japan, if necessary." So no perpetual Japanese bonds and less stimulus expirations, which is weighing on oil.
Markets are trying to assess the impact of Turkish President Recep Tayyip Erdogan declaration of a state of emergency for three months following Friday night's failed army coup. It gives him the power to restrict or suspend rights and freedoms and make up his own laws without parliament approval. It also allows him to kill alleged coup plotters as he said that the, “Turkish people have made it clear they want death for the "terrorists" who plotted the coup.” He said that, "all the viruses within the armed forces will be cleansed”. It is also raising concerns that Erdogan wants to change its allegiance from the West and Nato and become allied more with Russia and Iran.
Despite recent tensions with Russia Erdogan apologized for the downing of a Russian jet and since has grown much closer with Russian President Vladimir Putin. It is said that Russia actually warned Erdogan about Friday’s coup as it had picked it up by its intelligence as they monitored Turkish military communications. Tayyip Erdogan said Turkey is ready to work towards restoration of peace and stability in the region together with Russia and Iran which should raise large concerns for Europe’s Energy security.
When Russia promised to seek a natural gas cartel with Iran and later used natural gas supply as a political weapon against Ukraine and Yugoslavia, Europe got nervous realizing that they were too dependent on Russia for its natural gas needs and it put them at grave risk as Russia has proven that when push comes to shove, they will not be a reliable supplier. In response to the rising risk posed by Russia and Iran, Europe proposed the Trans-Caspian Gas Pipeline between Turkmenistan, and Baku in Azerbaijan. The Trans-Caspian Gas Pipeline project is supposed to transport Turkish natural gas from Turkmenistan and Kazakhstan to European Union member countries, circumventing both Russia and Iran. If Turkey aligns with Russia and Iran, then the influence on Europe’s natural gas supply will be significant.
Oil prices also saw a rebound as the Energy Information administration reported the 9th crude oil inventory reduction in a row. Since the beginning of the year a drop in U.S. oil production and surging demand has cut the year over year supply surplus by half. And while the EIA did report that U.S. crude oil production increased for the second week in a row, the increase came by Alaskan fields coming out of maintenance. U.S. crude production rose to 8.494 million barrels a day up from 8.485 million barrels last week but down from the 9.558 million barrels of oil production per day. Alaska saw the increase but there was a drop in U.S. oil production in the lower 48 states.
The EIA said that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 2.3 million barrels from the previous week. At 519.5 million barrels, U.S. crude oil inventories are at historically high levels for this time of year. Total motor gasoline inventories increased by 0.9 million barrels last week, and are well above the upper limit of the average range. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories decreased by 0.2 million barrels last week but are above the upper limit of the average range for this time of year.
Today we get natural gas inventories. The market is pulling back on the perception that it might not be hot enough to burn that extra supply. We will see so stay tuned!