The Weekly Wrap: March 18, 2011

Japan/Libya/Bahrain: trader heaven (or hell) One of the main canards of times such as this is that the markets hate uncertainty. The truth is that traders and investors are in a heavenly time. It’s pretty simple – if you are a bettor (which is what oil traders, for example, are), you make money only if the price changes on the volumes you buy. When they do shift either up or down — and keep doing so — you win (assuming, of course, that you bet on the correct direction). The last 24 hours have been absolute nirvana for the shrewd trader (though not so much for the laggards). Oil prices were down, then they shot up after Col. Moammar Qaddafi threatened to pursue his enemies into their closets (there is something apparently chilling about that closed-in image; or perhaps it’s the shoes?) and the United Nations Security Council voted to bomb him. We were well back up into the $100s-a-barrel prices. Now, after Qaddafi appears to have blinked (deciding perhaps that he prefers not to risk a possible indeterminate period of time confined to a spider hole with a long beard), oil prices have plunged. On each of those movements — if you were a well-hedged trader — you have earned big, big bucks. Of course, there are many losers too. Regardless, this is what traders live for — the profit potential in uncertain times.

Big Oil and the calculus of friendship: Paolo Scaroni, the agile CEO of Italy’s Eni, who manages to maintain relations no one in Big Oil can match — with Russia’s Vladimir Putin, with Kazakhstan’s Nursultan Nazarbayev and, of course, with Libya’s Col. Moammar Qaddafi with — is bristling at the international sanctions slapped on Libya. Scaroni calls the sanctions "shooting ourselves in the foot."

There is some fear that Eni, along with BP and Exxon, could face contractual problems with Qaddafi, Bloomberg reports. But that isn’t how oil deals have really worked in recent decades. Instead, governments have generally honored oil contracts from one regime to another, of course with some possible renegotiation.

So what is Scaroni really up to as he calls on Europe to abandon the sanctions against Qaddafi? Perhaps he is emitting a friendship code intended for others, such as Putin and Nazarbayev, a message that he is not a fair-weather friend.

Coal: When pressed, even the choosey loosen up. Being health-conscious, you thought you’d never eat another cheeseburger — until you were starving that one day, and McDonald’s was the only place open. So it is with electricity producers. Many nations have been moving away from coal-fired electricity, since it’s so dirty and spews out so much CO2, but now Japan’s dual natural disasters have shaken up those preferences. Coal may be back in a big way, reports the Wall Street Journal (though, for the record, the Journal is also hedging its bets. In addition to today’s optimistic coal piece, the paper ran separate optimistic natural gas and nuclear energy stories).

Here is how the dots connect: Japan, having to replace nuclear-produced electricity, is going to buy a lot more coal, and also liquefied natural gas. Some of the LNG is being diverted from Europe. That has made LNG more expensive in Europe and elsewhere as markets tighten. At the same time, Germany has at least temporarily shut down seven nuclear reactors. Put together the higher LNG prices, and the closed German nuclear reactors, and you get more European demand for much-cheaper coal. Make the same calculus in Japan and elsewhere, and you get the larger picture — more coal demand.

If this is right, much of the clean-air progress made in recent years appears likely to be set back in the coming months. Yet one would be remiss to ignore the shift of public sentiment, and hence political support, in recent years toward a cleaner environment. If that holds — and that’s my bet — then there may be added use of coal in the short- and medium-term as the market resolves the current uncertainty over nuclear power, but there will also be a mighty hindrance toward a wholesale shift to coal. Instead, there is reason to expect more momentum coming to the natural gas future that we’ve been discussing.

The Gazprom State: Outbreak of pragmatism. But does Nabucco win? Not to equate Russian gas policy with Col. Moammar Qaddafi’s war footing, but are we seeing a case of forced practicality? Qaddafi, after threatening to enter the closets of his enemies in Benghazi, has had a change of heart now that he might be bombed by France and the United Arab Emirates. As for Russia, it’s making more noises about reversing a long-standing war-footing in Europe, fought on the battlefield of natural gas pipelines. As we discussed last week, Gazprom, Russia’s politically inclined natural gas giant, has sought to reinforce its hold on the European market (where it supplies some 30 percent of the gas) by connecting up a gigantic new pipeline called South Stream. The United States and Europe have countered with Nabucco, their own proposed pipeline starting at the Caspian Sea. At stake, according to the latter folks, is the political independence of eastern and central Europe. But Russian officials are offering more details on possible plans to scrap South Stream and instead ship its gas to Europe in the form of liquefied natural gas.

In our videotaped interview last week with South Stream CEO Marcel Kramer, he said that he was in the dark about any such change of Russian plans. But now a couple of Russian government officials say South Stream may face an "insurmountable" political hurdle in Turkey, and so they are seeking economical alternatives toward accomplishing the same aim, but with LNG.

On first glance, this would appear to be a possible victory for Nabucco. But not so fast. First, Nabucco still doesn’t have sufficient gas to be built, mainly because the Turkmen — as they have done since the 1990s — won’t get with the program and commit to gas shipments and a pipeline. Second, what is the effective difference if Russian gas goes to Europe via pipeline or LNG? True, a pipeline suggests a more permanent marriage. But these days, divorce is mighty common. LNG provides the Russians a lot more flexibility in terms of markets.

Perhaps the Nabucco folks will go LNG as well?