Monday, September 14, 2009

Daily Energy Market Commentary - 9/14/09

$75 eh? – The Fundamentals

Not so fast. Unfortunately for oil we have not seen this price feat accomplished since October 14th 2008 when CL1 closed at $78.69/barrel. I am surprised at oils recent price behavior considering the potential for a commodities rally; especially when Gold and Natural gas are starting to take off. WTI Crude’s highest closing price since October 20th 2008 ($74.08) was $73.68 on August 24th 2009. Over this 10-month span oil was practically flat. That is not to say money wasn’t made on the violent swings over the span, but as an asset class, crude has been unreliable.

Looking at a fundamental driver of Crude prices there has been plenty of dollar
weakness. As I am writing this, the USD is trading at nearly a 12month low vs. the Euro €1= $1.4604. The yearly movement in exchange rate is virtually flat. (September 29, 2008 closing €1= $1.46170). What does this tell us about crude? Over the past 12 months it has been paired with the euro/dollar price movement. However, I am starting to see a divergence. Over the last trading week the USD has weakened considerably vs. the EUR yet WTI crude has not strengthened, and instead sold off. Only time will validate this recent move.

If we look at some of the news affecting crude, one could argue oversupply as a
reason for the lack of movement towards the upside. For instance, Petrobras along with Exxon Mobile, Chevron, and RDS have discovered a huge oil well off the coast of Sao Paulo/Rio. This well is predicted to have the capacity of 2 billion barriers of light sweet. It should be fully functional by 2013 if Brazil’s government can find more ways to subsidize Petrobras. Additionally, the Chinese government granted a $30 billion loan through Construction Bank of China (last week) to PetroChina. This loan was primarily for sand-oil exploration in Canada or “to secure natural resources,” according to a spokesperson from PetroChina. Lastly, OPEC has decided oil prices are fine at the current supply. I believe OPEC is hoping to see $80 to $85 a barrel. However, this is wishful thinking in the short-term.

Price Targets and Technical Plays

Where is oil headed? Well for the time being I see it trading as low as $63 and as high as $72. It is a broad range, but it has been notoriously volatile. Also, CL1 seems to be trading within 1.4-1.6 standard deviations from the sample mean (Keep in mind for timing on entries and exits). In addition, do not forget about the possibility of the economy reverting back into recession either. With these considerations, my long-term outlook six months from now, we will see $80/barrel…

“Inflation is coming in 2010”


Authored By: Pat Ambrus
Edited By: Alexander Lê

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