1 Sep 2 @ 10:44am by Matt Smith in Crude Oil, Economy, energy consulting, Global Energy, Natural Gas, Random

Commodity Markets Through The Fab Four

It’s not that I’m a huge Beatles fan, but I read last week that Rolling Stone magazine were releasing their list of top 100 Beatles songs, and I thought, ‘ooh, I bet they have some songs that relate to commodity markets’. And sure enough…they do. So here they are – some links are obvious, and some are tenuous. But all of them rock:

Magical Mystery Tour - A number of energy commodities take a magical mystery tour before arriving at their point of consumption. For example, LNG imports into the UK predominantly come from Qatar and Trinidad, while the US also imports LNG from these places, as well as from Nigeria and Yemen. The US has net imports of approximately 10 million barrels of oil a day (in crude and products, from countries such as Canada, etc – referenced in last week’s post), while also exporting approximately 2 million barrels a day to places such as Latin America and, err, Gibraltar…a magical mystery tour indeed.

When I’m Sixty-Four - this one could be deemed as a reference for crude oil, which was happy-go-lucky at nigh on $83 in early August, only to precipitously tumble in recent weeks on economic worries and sky-high US stockpiles of crude and products. So, it is not beyond the realms that we could be talking about Texas tea in the near future….when it’s sixty-four (bucks). 

Come Together – A kinship has emerged between risk assets, as equities and commodities have moved in-step since bottoming out early last year. Their close comradeship makes sense to a certain extent, with crude tracking equities for a sign of economic recovery (and hence returning oil demand). But should this tight relationship continue for the foreseeable? It would seem unlikely as fundamentals for crude should climb into the driver’s seat eventually and stop riding shotgun, but for now, they come together.   

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Back in the USSR – While resource-rich Russia has recently had its problems, both their economy and production levels across commodities are now looking brighter. Russia is producing a similar level of natural gas as the US, at 24 Tcf a year, while oil production has now reached a new post-Soviet high of approximately 10 million barrels per day. This is forecast to rise to 10.5 million barrels per day in 2011, maintaining Russia’s status as the second largest oil producer in the world.

Hello Goodbye - Just as crude has struck up a friendship with best buddy equities, it has nurtured an arch-nemesis in the US dollar. Although this relationship shifts from tight to tenuous at moments, the chart illustrates there is definitely still an inverse relationship at play. When risk appetite increases, there is a move out of the dollar and US-denominated Treasuries, and into riskier assets such as equities and commodities. Conversely, when there is a flight to safety, funds flee crude and into the arms of the greenback. Again, will this relationship breakdown at some point as dynamics change? Yes. But for now, as the dollar says goodbye, crude says hello.

Revolution - 2010 seems to be the year that shale has finally been embraced as a revolution for the US natural gas market, after the uprising had been quietly building for so many years. As prompt prices have edged lower through the year, production has continued to increase, signaling that the unconventional shale gas plays have a low-breakeven rate (low enough for production to hit a record high for the year, as prompt month prices hit their lows). Shale now makes up approximately 14% of US production, with the EIA predicting this number to rise to 24% by 2035.    

Ob-la-di  Ob-la-da – la-la-la-la life goes on. Doesn’t it just?

Please feel free to contribute any good ‘uns that you think I’ve missed…..

1 Comment on this post:

  1. Kent Evans says:

    Here Comes the Sun – solar power takes off!

    Penny Lane – where the dollar is headed if it doesn’t get its act together.

    8 Days A Week – I wish there were an extra day in the week so maybe I could get another Burrito Bites post to read!

    - KE

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