Happy 2011! I hope this finds you in fine fettle. I would like to kick off 2011 by highlighting some themes (splatter gun style) which I expect to be an undercurrent in this year’s voyage through the rough seas that is commodityworld™. I nearly managed to avoid making any predictions this year (after last year’s farcical forecasts – $100 oil, rising nat gas prices, Susan Boyle dating, etc..) until Tom Fowler from Fuelfix asked me for some (here), so I figured I would expand on a couple of them – not because they are revelationary, but because they are worth keeping an eye on.
So first up, coal. I think coal will show more upside this year than crude oil or natural gas, based on that old chestnut of rising emerging market demand. China and India have been projected to increase imports by 78% in 2011 as economic expansion drives up consumption. Implied demand for coal in China has been trucking along at 16% (YoY) on a monthly basis since 2006, and it seems unlikely that this trend will let up anytime soon.
Oil / Gas ratio, 2003 - present
Next up, the oil / gas ratio – we’ve visited this a couple of times on the burrito (hark, here and here). This ratio is simply the price of a barrel of oil divided by the price of natural gas per MMbtu, and is currently 19.5 – sat at its short-term mean (= 200 day moving average). Given that oil is intent on hitting triple digits while natural gas is experiencing record production (at a time of elevated storage levels, stymied industrial demand, etc), it’s not the boldest call in the world to say we will see this ratio spend much of MMXI above 20. But I’m making it nonetheless.
Finally, the US economy. I still-still-still think it is set for some wobbles, despite the flow of improving data that is coming through. The number of jobs created last year was over 1 million, which is awesome…….until compared to the 8.4 million lost in 2008 and 2009. Another key concern is the housing market and how prices look to be rolling over again:
S&P Case-Shiller Composite 20 Home Price Index
And this is before the deterrent of rising mortgage rates, which have now rallied hard from historical lows in the last month or so. A stronger housing sector is another piece of the puzzle which needs to be in place, along with falling unemployment, to spur on a sustainable economic recovery, which in turn will spur on further energy demand.
Well, that’s my two cents’ worth at the beginning of 2011. As all roads do, this leads us back to our dearly beloved energy commodities, posing the question: in this year of the rabbit, which commodities are going to be the hare, and which the dog? Keep your carrots eyes peeled.
Matt…I enjoy reading your posts. Why do you think there continues to be so much gas supply pouring into the market at these low prices? It seems to me that there should have been a price response by now…but it has not seemed to happen. Are these harvesting companies just happy to make whatever they can? Further, do you think the Dodd-Frank Act of 2010 has contributed to the stalled speculation of NYMEX NG futures contracts?
Hi James – thanks very much for the questions; I’ve been mulling this over, and figure a few lines probably wouldn’t be a justified response to you; bear with me and I’ll put a post together about this in the next week or so. Thanks again.
I happened to read Matt’s name on a chinese website which cites your recent point that Chinese import stats was the only factor of Oil going up.
I googled to find here, very interesting and responsible.
Hi Brzezinski,
Yes – I commented to a reporter yesterday that the only real fundamental factor for crude’s move higher yesterday was Chinese crude imports hitting a 4-mth high – everything else was focused on the disruption in the Middle East. Glad you tracked me down – I hope you will become a regular reader!
All the best, Matt