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Posts Tagged ‘energy demand’

1 Jan 6 2010 @ 10:45am by Matt Smith in Biofuels, Capital Markets, Crude Oil, Economy, Natural Gas, Technology

10 things I expect will happen in 2010.

1) Crude oil will break $100. As demand picks up (especially in Asia), stockpiles are reduced, and (undue) inflationary fears mean funds fly into commodities. Consensus across the board is looking at a range of $70-$80, so this is exactly what will not happen.

2) The high for the natural gas prompt month for 2010 will be three times larger than the prompt month low in 2009.

square root

The square root recovery.

3) The US recovery will be much less of a ‘v-shape’ and more of a square root (we are already in the bounce) or a squigle (= wobbly, in a weebles wobble but they won’t fall over kind-of-way). Although US GDP for Q4 ’09 and Q1 ’10 is set to come in with impressive gusto, this will not be sustained throughout 2010 as the inventory boost proves to be transitory, consumer spending stutters, a housing recovery splutters, and a waning stimulus package is unable to spur a robust recovery.

square root too

Look familiar?

4) Smart grids will be one of the buzzwords of 2010, as public and private funds flow into energy technology as the investment hotspot of the year. All things associated with natural gas will also be a hotspot for investor flows, as the fuel becomes an ever-more attractive option for US non-reliance on global resources. 

5) The unemployment rate continues to worsen, despite intermittent blips of improvement. The rate finally peaks closer to 11% than 10%. 

6) Inflation causes very little concern in 2010 until the latter stages of the year, after the Fed withdraws monetary stimulus and starts to consider raising rates. This will either put downward pressure on crude oil, as the US dollar becomes more attractive due to an impending higher interest rate, or (more likely) the bosom-buddy correlation between crude and the US dollar comes to an acrimonious end. » read more

0 Dec 18 2009 @ 10:59am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy

Humdrum Conundrums

Something has got to give. Whether it is in commodities, currencies, equities or bonds, something is going to change direction, and it is going to be the mother of all moves. Yes, indeed.

I don’t want to bore you with ramblings about all manner of assets, so let’s skip merrily past go, to arrive at the VIX Index. The VIX is a key index to watch as it measures volatility (on options on the S&P500 equity index…but the key bit is volatility). This index is key because volatility reaches extremes at turning points and moments of utter turmoil. Case in point, the VIX hit its highest level around the time Lehman Brothers went bankrupt in late 2008 – a record since its inception in 1990 (think Goodfellas, Milli Vanilli exposed as fakes, and the release of Nelson Mandela – no ranking of importance).

Milli Vanilli

Milli Vanilli

But as the financial crisis has unfolded, risk-taking has returned to favor, and fear has faded. Correspondingly, the VIX has fallen, receding to pre-Lehman lows, while the S&P500 has harpooned to 14-month highs.

So what’s the big deal, you ask? Well, we are at an absolutely critical juncture as we await to see whether equity markets are indeed correct in confirming a solid recovery (by rallying, ooh, 68% since March), or whether they are just under the influence of liquidity-fueled irrational exuberance. The VIX is telling us that the market is one of the two:


SP vs CL vs VIX


So this leaves global commodities such as crude oil at historically elevated levels, while volatility is stuck in the mire. The fear is that if an economic recovery stalls, equities and global commodities will pull back, and volatility will rise once again.

Rising volatility seems somewhat inevitable, as markets seem too complacent with a recovery that is as solid as a blancmange. But just like good art provokes a strong emotion, a good chart should provoke a strong opinion, and we have to apply some faith in the fact that ‘the trend is your friend’, and this pattern could continue to play out in 2010. (but i doubt it, he screams…).

0 Nov 4 2009 @ 7:30am by Matt Smith in Capital Markets, Economy, Natural Gas

We will not see $2 natural gas prices again in my lifetime (said the lemming).

lemmings

clever lemmings wear floatation devices

From the $2.40 lows of early September 2009, US natural gas prices are now at a much firmer $5 level, without feeling like they have come under the influence of a large tsunami of speculation. Needless to say, the market has seen its fair share of hype, which is only to be expected when an asset falls to a seven-and-a-half-year low. However, the key reason behind this ascension from the depths of the trough is due to the contango in the current market (where near-term prices are below that of longer-term pricing), rather than a recent bevy of frenzied buying.

A contango market is not uncommon for natural gas (in fact it is natural – no pun intended), but the way each prompt month has succumbed and surrendered, only to be superseded by a much higher prompt contract, has had an air of weirdness about it, almost apathy. This weirdness is not in a creepy Kim Jong Il kind-of-way, but weird in an 80-year-old-on-roller-skates kind-of-way; strange, yet enthralling. Nonetheless, each successive contract has clambered higher, scaling away from the September lows with each roll of the board.
shazbot!

...shazbot!

 

As we slice and dice the ingredients for our energy burrito, it is important to note that back in March it felt like we were fast approaching Armageddon. It is fair to say that although the economy may double dip next year or in 2011, nothing will feel as bad as it did in March 2009 – in the belly of ‘The Great Recession’.

This same sentiment applies to natural gas. Prices are still vulnerable, and will fall further if the bearish stars align: we have an exceedingly warm winter, storage levels remain elevated, production ramps up, and industrial demand fails to bounce back. Will we see new lows in 2009 or early 2010 before our lemming reaches his watery destination? I say shazbot!

1 Oct 13 2009 @ 1:00pm by Matt Smith in Capital Markets, Economy, Global Energy, Random

Things that make me go hmm

This one really gets my goat, does my noodle in, and twists my melons. And it goes by the name of  ‘the underemployment rate’. So, the story begins….the underemployment rate includes those people who are unemployed, those who are working in a part-time job (but wish they had a full-time job), and those who are so discouraged that they have (temporarily, hopefully) stopped looking. So it is basically the unemployment rate (a portly 9.8%) plus a few people here or there working part-time in a coffee shop and sort-of-looking for a proper job, plus those who just can’t be bothered at all. Right? Wrong.  underemployment

While the current unemployment rate is 9.8%, the underemployment rate is nearly double at 17%. This is reaching pandemic proportions, as baby boomers are forced to retire later as their pensions have just been halved, 18% of  18-24 year olds are unemployed, and 7,000 people a day are facing the expiration of their unemployment insurance. 

And that isn’t even the biggest doozie on deck: since the start of the recession in December 2007 we have seen 6.8 million people lose their jobs in the US – just shy of the population of Hong Kong.

The crux of the problem arises when we build our energy burrito; the ingredients just don’t add up. Energy demand is driven by consumption. Consumption is driven by spending.  And spending is driven by income – income earned in a job.  And consumer spending makes up approximately 70% of GDP in the US. With such a drag on GDP, how can we expect energy demand to not only recover (without such espresso shots as cash for clunkers and $8k first-time homebuyer rebates), but also spur itself on to significant growth?

Put simply, we can’t. And the punchline? Sorry, there isn’t one.