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What the Specter of Global Uncertainty Means For Asia

by | published May 1st, 2014

I’ve spent the last two days in Baltimore, hammering out the details on my next big project. So stay tuned, there are some exciting new opportunities headed your way very shortly.

However, before heading out of town, I was scheduled to do an interview with CNBC Asia. Given the time difference, that meant I needed to be in a Baltimore studio at 1 o’clock in the morning. The show was live from Singapore.

But it didn’t go off as planned. A studio snafu prevented the interview, which left me with mixed emotions. I was happy about the extra rest, but it came at the expense of continuing an important conversation with an audience half way around the world.

Much like my discussion on Chinese television a few days ago, this one involved the crisis in Ukraine and what it means for global energy markets.

Only this time, the focus was to go beyond the impact it’s having on European natural gas and delving into what it means for Asia.

Of course, the interview didn’t happen, but there is no reason I can’t tell you what I would have said.

The impact is much bigger than you think…

The Ukrainian Shadow on the Energy Markets

It all stems from what I call the rising specter of global uncertainty. It contains three overarching components.

First, geopolitical tensions and uncertainty have a way of unnerving regional markets worldwide whether the focus of the unrest is located in the particular market or not.

What is happening in Ukraine has an effect on places like Singapore…or New York…or Buenos Aires, even though these markets have little direct relation to Ukrainian energy needs or gas flows between Russia and Europe.

That’s because we now live in an integrated global energy market. Whether one is a net importer, exporter, price maker or price taker, events like this – no matter where they occur -have an effect.

Think of the energy market as a giant inner tube…

Assuming there are no leaks and you have an air bubble somewhere in the tube, pushing it down will only cause it to appear someplace else.

Basic elements of supply, demand, availability, and the ability to transit energy from place to place ripple throughout the integrated system. Prices simply have a way of reflecting the weakest or most unstable link in that system.

When it comes to estimating availability, having ample domestic sources of raw material – oil and gas – emerges as the best protection from the immediate volatility in the global market. But, aside from a major dislocation worldwide, even that is not always guaranteed.

And it does not protect against a spike in prices.

The average consumer may equate the price to what it costs to fill up at the neighborhood service station, but the price is actually a function of the broader market trade.

It is demand in places like Asia and across the developing world that drives this market, not the needs of established industrialized regions like North America or Western Europe.

That brings us back to how the Ukrainian crisis figures in all of this. The crisis is currently the biggest “bubble” globally, providing the most pronounced pressure on natural gas prices along with a knock-on effect on crude.

This doesn’t mean as the ebb and flow of the crisis unfolds that each event will have an immediate effect on prices. But it does mean that traders, producers, and end-users will keep an eye on events as energy exchanges progress.

Russian tanks and armored personnel carriers moving across the Ukrainian border or a disruption in gas deliveries to Europe across Ukraine would result in an immediate spike in prices. But it is the uncertainty of the situation that has the market unnerved.

The result of that is felt worldwide.

The LNG Revolution Gathers Steam

Second, there are medium term results in the direction and balance of trade.

Even without knowing how the crisis will be resolved or how long it will take to reduce tensions, two conclusions are already apparent – Russia will be looking to increase the transit of gas to Asia; and liquefied natural gas (LNG) will become a significant new balancing agent in the global market.

The Russian move toward Asia will result from the rising level of acrimony between Moscow and Brussels (both headquarters to the European Union and NATO). Europe has already been diversifying its energy sources to become less dependent on Russia. That will now be intensified.

Gazprom, Russia’s huge natural gas behemoth, will find it increasingly difficult to sell more gas to the EU. That increasing volume is essential for the Russian budget, leaving a move of the gas to the east as the only realistic alternative.

As for the LNG component, elements I have mentioned in OEI before will now become even more paramount. Accelerating LNG trade internationally will allow nations to be less dependent on pipelined imports.

The LNG will also allow for the development of local spot markets and those markets will serve to stabilize and restrain prices no longer based only on gas moving on foreign-controlled pipes.

The LNG revolution was coming anyway. But the geopolitical uncertainty revolving about Ukraine has simply expedited its arrival.

A Big Win in the “New Cold War”

That leads us to the final observation I would have made earlier this morning. As that LNG trade intensifies, it will be U.S.-based volume that will figure most prominently in the balance that is unfolding.

Those exports will not begin for a least another year, but when they begin, natural gas prices in both Asia and Europe will progressively come under the influence of the U.S. largess in unconventional gas production.

The Russian-Ukrainian crisis is simply providing a central position for American energy trade moving forward. That trade will result in greater reliance by both continents on the U.S. as an energy balancing factor. It will also result in better, more predictable pricing in Asia and act as a counterweight to the increasing Russian exports via pipelines into the region.

That’s hardly what the Kremlin had in mind when the situation in Crimea and Eastern Ukraine unraveled.

For Asia, a crisis elsewhere in the world is now providing an opportunity for better energy availability at home. But the new market will be driven by Russian gas coming by pipeline and US LNG ferried in by tanker.

And that may just transport this new version of the Cold War to a whole different part of the world.

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  1. May 2nd, 2014 at 09:05 | #1

    I like your analogy about the inner tube for the ramifications in the whole geopolitical arena in terms of energy supply and demand. But what kind of an impact will it have if the dollar is dropped, as the reserve currency for trading oil and gas?

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