Argentina, California, And Natural Gas
by Dr. Joe Duarte
|Thursday, April 01, 2004
The pre-market stock futures were drifting lower but were mixed as of press time. The U.S. Dollar was mixed. Asian markets were mixed. European markets were higher. U.S. Treasury bond yields were higher in price. The U.S. Ten Year note was trading with a yield of 3.83% in electronic trading. Crude oil was trading above $35. Gold was trading above $425.
The economic calendar for April 1: Initial Jobless Claims For Mar 27 Wk. February Construction Spending . DJ-BTM Business Barometer Mar 20 Wk. March Manufacturing ISM. Money Supply.
Is Argentina Sparking A Global Energy Crisis?
Natural gas futures for June delivery closed at $5.98 on 3-31, while the December futures closed at $6.31, predicting that a new, and likely sustainable up leg in the sector may have just started.
Argentina could be headed for a second leg down the misery highway. After a rocky few years, the country has of late been starting to show signs of some economic stability. But in the last few weeks, the specter of an energy crisis, prompted by natural gas shortages could set the stage for major problems, for Argentina as well as for Chile, the country that receives any natural gas surplus from the Argentineans.
According to the Wall Street Journal: "the country's major industrial firms are now heading into turbulent waters as energy problems cast a pall over the upcoming winter months" The Journal noted that "the first signs of trouble came two weeks ago, when Cammesa, the agency that manages the wholesale power market, said it would begin sporadically cutting electricity to 31 major industrial firms that had signed lower-priced, ["interruptible"] contracts. It was the first time Cammesa had to do so since it was set up in 1992."
The situation is very unpredictable, and fluctuates on a daily basis, which may add to the energy sector's volatility.
But at the core of the problem, seems to be the lack of investment in power generation plants, a problem similar to that experienced by California. According to the Journal: "Local power companies suspended investments aimed at increasing capacity in recent years after Argentina plunged into an economic crisis and authorities froze tariffs."
According to multiple sources, Argentina has begun to ration its natural gas exports to Chile, while at the same time: "In an emergency accord meant to avoid a blackout in Argentina, Brazil started transferring 500 megawatts of power to its neighbor in the early hours of Tuesday, the Brazilian electricity grid operator ONS said Wednesday. Brazil was originally expected to export power to Argentina starting May 1, but moved the transfer forward, which is expected to last for up to 48 hours."
Directly and adversely affected by this "sudden" problem is Chile, which buys 70% of Argentina's "surplus," natural gas. The suspension of exports will hurt Chile's economy. More important, is the fact that, according to Stratfor, Chile "obtains 35 percent of its electricity from long-term gas supply contracts with Argentina. Over the past decade Chile's dependence on Argentine gas has increased, especially in the region around Santiago, where 90 percent of industries and more than 50 percent of residential consumers depend on (Argentineans) supplies."
Stratfor.com also noted that Argentineans President Nestor Kirchner bowed to pressure from industrial companies " in the provinces of Cordoba and Tucuman (who) have appealed to their governors to compel the president to suspend gas exports and implement other conservation measures (in order) to prevent energy supply shortages that could disrupt industrial output and derail Argentina's economic recovery. Industrialists in other provinces -- including Buenos Aires, the political fiefdom of former President Eduardo Duhalde -- also are complaining about energy shortages."
The intelligence web site also noted the following: "Government economic officials and industry leaders have warned persistently in recent years that without new capacity expansion investments, Argentina would barrel headlong into an energy crisis as soon as its economy started growing again. Economic growth resumed in 2003. Argentina's economy grew 8.7 percent that year, while industrial production shot up by 16 percent. It looked like 2004 would be another stellar year. The construction sector grew 34 percent in January and February 2004 compared with the same months in 2003 -- a clear sign that local industries are finding the capital to make some new investments despite their country's continued isolation in global credit markets. However, Argentina's robust economic rebound after years of insufficient investment in energy infrastructure brought the long-anticipated supply crisis to a head."
It is not clear what the situation is in Argentina, and it may still be early to tell what effect this problem in South America will have on global crude oil supplies, since for now it remains a natural gas problem. But, as we noted above, natural gas prices broke out.
OPEC has pledged to cut production, meaning that if Argentina began to switch to oil as a fuel for its industry and heating needs, it would add still another layer of competition to the demand side of the equation, to go along with China, an increasingly surging Japan, and the U.S.
Southern California has already experienced a heat wave, and on 3-30, California experienced a "power alert by the state grid operator that signified electricity reserves had fallen below 7%. If reserves dip below 5%, the grid operator can order utilities to interrupt service to customers who volunteer to have their power cut when supplies are tight in exchange for cheaper electricity rates."
Stratfor.com noted that "Chilean President Ricardo Lagos said March 25 that his countrymen have nothing to worry about, insisting that Chile's energy security ["is doubly guaranteed."] Contingency plans already are being implemented to switch combined-cycle power plants from gas to fuel oil; if rationing is called for, it will not hurt the economy's growth in 2004."
Somehow, that sounds as of somebody's whistling past the graveyard.
We could be experiencing the beginning of a significant global energy crisis.
The Philadelphia Oil Service Index (OSX) moved slightly higher, and closed back above the 100 area. The index was oversold, having lost 10% of its value since the beginning of March. The index had until recently remained near 110, but its break below 100 signals that the top is now in for energy. Whether this is a signal that the energy sector has made its seasonal high remains to be seen. A long term move, if this move regains momentum could take the OSX to 140. The index rallied smartly on 1-20, and has reached an important resistance level, but had remained flat. For more details on trading the energy sector visit our energy timing page, featuring our highly effective OIH timing model and our Top Ten Energy Stock List.
In the current market, we recommend a copy of Successful Energy Sector Investing: Every Investor's Complete Guide. The book predicted many of the current developments in the economy and the energy markets, and provides an excellent set of benchmarks and trading lessons for what could be in store for the future.
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