Haiti's Financial Relief Is Just Offshore

Haitians have been suffering long before the devastating January 12th earthquake. Foreign capital investments have been extremely limited due to years of corrupt governments and lack of investment banking infrastructure. New offshore shallow water oil discoveries may have the potential to drastically change Haiti's financial future.

As Haiti was experiencing the worst natural disaster in its history, French scientist Dr. Daniel Mathurin was releasing his latest hydrocarbon exploration research on the Greater Antilles.
Dr. Mathurin writes, "The Central Plateau, including the region of Thomond, the plain of the cul de sac, and the bay of Port Au Prince are filled with oil. Haiti's oil reserves are larger than Venezuela's. An olympic pool compared to a glass of water that is the comparison to show the importance of Haitian oil compared to oil in Venezuela."

Further evidence that Haiti has potential to be a major oil producer is given in a recent US Geological survey revealing the Greater Antilles as having discovered at least 142 million barrels of oil and 159 billion cubic feet of gas. Undiscovered oil may be as high as 942 million barrels and 1.2 trillion cubic feet of gas.

Energy exploration and production firms will now be reviewing these recent findings to analyze how they may begin to capitalize on Haiti's hydrocarbon bonanza. Revenue derived from the Haitian government leasing offshore oil and gas development will greatly help the longer term recovery. For a country that is in desperate need, these discoveries are great news, and gives their fragile future greater hope.

Managing Governmental Policy Uncertainty Risk

Of all the risks that energy traders manage, there is none more difficult than governmental policy risk, when a change in well established policies may be on the horizon. This past week traders were forced to deal this risk and will likely continue having to manage governmental policy uncertainty for the next several weeks.

The direction of US financial regulatory policy may change dramatically with new proposals voiced by President Obama on Thursday. Appearing with Paul Volcker, instead of current Secretary of the Treasury, Tim Geithner, President Obama announced he will seek restrictions on proprietary trading and impose a levy on bank wholesale funding. In and of itself the market would be able to adjust to these policy changes. The greater and more difficult risk adjustment comes into play with the man standing next to President Obama as he gave his speech.

Lots of questions arise from last Thursday's speech. Where was Tim Geithner as President Obama was speaking? Where was Ben Bernanke? Why was 82 year old Paul Volcker called out of retirement bliss to construct the new regulatory policies? Why are some Democrats now changing their votes against the renomination of Ben Bernanke? Not knowing the answers to these question, traders do what they are trained to do when sudden uncertainty arises; get ahead of the crowd and exit your long positions immediately.

If greater clarity is given that Ben Bernanke will be reappointed, the markets will likely stabilize quickly. Should more Democrats try to separate themselves from President Obama by voting no to his reconfirmation, we are likely to see equities and commodities continue to slide as traders adjust to a potential strong dollar policy with Paul Volcker receiving greater prominence in the Obama administration.

The most conservative risk management tool in this type of political uncertainty is to stay flat on your trading until clarity appears. Energy traders wanting to gain an advantage before clarity is apparent should monitor the DailyFX Carry Trade Index. The index has reversed from 2009 channel highs and now sits poised to break channel support. Should this event occur, it is a clear sign traders are making a trend shift away from the year old arbitrage; sell the US dollar buy commodities. Exiting these positions requires they buy back the US dollar, which will increase downward momentum on the DailyFX Carry Trade Index. This will create more fear in the market and pressure the energy complex lower.

CFTC Energy Position Limits Proposition for the Bigs

The Commodity Futures Trading Commission has proposed new position limit rules for the large trading houses. The new rules will only affect the ten largest position holders. Will these rules make a difference for energy traders? In a nutshell, the rules are likely to not even affect the bigs.

The key points of the new rules are as follows:
1. Position imposed limits on oil, natural gas, heating oil, RBOB gas traded on NYMEX and ICE
2. For all trading months combined limits at 10% on first 25,000 contracts open interest,2.5% next 25,000 lots
3. Single month position limits proposed at 2/3 of the all trading months combined position limits
4. Spot month position limit for contracts physically settled at 25% of estimated deliverable supply

Trading houses knew these rules were coming when Gary Gensler took office in May. The CFTC has been under pressure to strengthen limits due to populace thinking that large speculators were the cause of crude's run up to $147. Since bona fide commodity inventory hedging is exempt from the new rules, most of the bigs have enlarged their physical product trading desks.

The trading limits proposed are very generous. At current trading levels the new rules will have virtually no impact on market liquidity. Had the CFTC wanted to make an impact on speculation the focus should have been on margin requirements. The downside would be higher costs to producers and refiners which would inevitably be passed along to end users, ultimately raising the price of refined products.

It was interesting to see the energy complex remain virtually unchanged Thursday when the rules were released. The market then pulled back on Friday with the exception of nat gas rising .10. The pull back was more related to a strengthening US dollar vs the euro rather than large traders exiting long positions in fear of the new rules. For now, do not expect the trading limits to have any affect. This may frustrate law makers who may seek stronger action should the energy complex break through to new highs in ninety days when the proposition is scheduled to go into effect.

Predictable Arbitrage Hedging Opportunities

Generating additional profit margin for wholesale energy sellers generally requires a willingness to take on added speculative risk. Understanding systematic basis movement tendencies enables sellers to increase margins without greatly increasing risk. This is the essence of arbitrage hedging.

The tendency of basis to narrow over time at a predictable rate in a contango market, is a low risk profit opportunity. In a full carrying charge market, basis will narrow over time at a rate approximately equal to storage costs per unit of time. To profit from this narrowing basis movement simply buy the less expensive cash commodity product and sell the corresponding futures contract. As the basis continues to narrow the loss on the cash position will be offset by the greater gain on the futures contract.

The key to making arbitrage hedging a consistent winner is understanding the type of market the particular energy commodity you are selling is currently trading. Should the outlying futures contracts be trading below current spot prices, the above strategy would result in a loss. In this scenario of a backwardated market, basis movements are not systematically predictable.

There are very few low risk opportunities for energy wholesalers to add profit to each gallon sold. Taking advantage of systematically predictable basis movements through arbitrage hedging, is one strategy that every seller with storage capacity should be aggressively implementing.

Innovative Nat Gas Drilling Technologies Creating Reliable Long Term North American Supplies

In the past few years, natural gas drilling production technology innovation has seen a dramatic increase in efficiencies. Combine these new drilling techniques with the development of unconventional shale gas resources and the stage is set for dramatic production increases and reliable long term supplies throughout North America.

One of the major reasons nat gas is not currently used on a greater scale by transportation and industrial end users is that in the past nat gas supply stocks were not available in reliable quantities to enable the use of long term forward contracts throughout North America. And even in certain areas where supplies were adequate, price volatility made gas a difficult risk proposition.

We are entering a new world now of abundant gas supplies. Encana's, Dave Thorn, states, "The economical recovery of shale gas has been a game changer. Reserve life estimates have increased dramatically, and North American gas supplies could rise by 25 bcf per day."

These estimates are being driven by rig efficiencies. Not too long ago, supply estimates were largely based on the number of drilling rigs in production. However, unconventional gas wells are driving production increases even though active rig counts have fallen 50%.

Not too long ago shrinking nat gas supply stocks created worries that North American gas supplies were in a permanent decline. Liquid Natural Gas was seen as a possible, yet expensive solution to this decline. Those worries are quickly disappearing. The one caveat to the future of natural gas is proposed environmental regulation. These concerns are likely to be overcome by recent environmental research showing the new shale drilling technologies are not harming local water supplies. This research along with the economic and environmental benefits of switching to gas as a bridge fuel will make the future very bright for natty gas.