Energy prices, along with all commodities, will look back at 2011 as the year of intense correlation to the macro economic environment. Successful energy traders not only had to have a firm grip on traditional supply and demand fundamentals; a strong understanding of macro events and their consequences were essential to be on the right side of price movements. Unfortunately for energy market participants, 2012 will require the same nimbleness to accurately navigate the major tidal movements of the macro economic waves.
2011 began the year with a strong upward trending pricing structure for crude, mogas and distillates. Crude reached a high in April of $115 on the hopes of a strong world wide economic recovery. Then came the less than stellar US economic data in May, combined with fears of European sovereign debt, creating a sell off in crude down to $75 in October. Crude has since rallied back to the three figure level with one week left of trading for the year on hopes that the United States and emerging market economies will carry world economic energy demand.
Forecasting 2012 energy futures will not be an easy task as these macro economic forces will continue to mystify the best of traders. Until clear trends manifest themselves again, successful market participants will incorporate hedging strategies to compensate for influences well beyond the traditionally relied upon fundamental tells of supply and demand; contango and backwardation.
Saturday, December 24, 2011
Saturday, November 19, 2011
Analyzing the WTI/Brent Price Spread
The price of WTI vaulted 3.3% this week. The catalyst being that on Wednesday, Enbridge said it would buy a 50% stake in a pipeline that
brings oil from the Gulf of Mexico to Cushing, Okla., and reverse the direction
that the oil is pumped, so that oil would be leaving Oklahoma instead of
arriving. That will ease the glut of crude oil, known as West Texas Intermediate
crude, or WTI, stored at Cushing—a glut that has been keeping the price of WTI
far below that of Brent, the European standard.
What was even more noticeable was that the price of other world oil benchmarks did not budge. Brent crude actually retreated on price. The "correlation" between the two crudes—their tendency to move in the same direction—has averaged 0.96 over the past two decades, just slightly below a perfect correlation of 1.0. On Nov. 15, it had fallen to 0.71, the lowest in at least 20 years.
Refiners in the US Midwest had been benefiting from the price of lower WTI Cushing prices and enjoying large crack spread margins. On Wednesday Midwest refiners faced a new world of a tightening spread between WTI and Brent. Marathon was one of several refiners whose stock sold off 5% on this new dynamic.
The global event pricing pressures that have been lifting Brent higher, have begun to retreat. Libyan crude production is coming back on line faster than forecasted, European GDP growth is slowing more than expected and Israeli/Iranian discord seems to playing itself out in rhetoric rather than rockets.
This might not be the best time to bet that the "spread" between WTI and Brent will widen, however. The difference between the two has dropped already to about $9 a barrel on Nov. 15 from about $25 in mid-October. While some strategists see the spread narrowing even further—Goldman Sachs, for one, expects it to shrink to $6.50 during the next six months—the move likely won't be in a straight line. The best bet: Wait for the spread to widen before placing such a trade, or avoid it entirely.
What was even more noticeable was that the price of other world oil benchmarks did not budge. Brent crude actually retreated on price. The "correlation" between the two crudes—their tendency to move in the same direction—has averaged 0.96 over the past two decades, just slightly below a perfect correlation of 1.0. On Nov. 15, it had fallen to 0.71, the lowest in at least 20 years.
Refiners in the US Midwest had been benefiting from the price of lower WTI Cushing prices and enjoying large crack spread margins. On Wednesday Midwest refiners faced a new world of a tightening spread between WTI and Brent. Marathon was one of several refiners whose stock sold off 5% on this new dynamic.
The global event pricing pressures that have been lifting Brent higher, have begun to retreat. Libyan crude production is coming back on line faster than forecasted, European GDP growth is slowing more than expected and Israeli/Iranian discord seems to playing itself out in rhetoric rather than rockets.
This might not be the best time to bet that the "spread" between WTI and Brent will widen, however. The difference between the two has dropped already to about $9 a barrel on Nov. 15 from about $25 in mid-October. While some strategists see the spread narrowing even further—Goldman Sachs, for one, expects it to shrink to $6.50 during the next six months—the move likely won't be in a straight line. The best bet: Wait for the spread to widen before placing such a trade, or avoid it entirely.
Sunday, October 9, 2011
The Euro Zone Financial Crisis and Liquid Energy Futures
Crude, along with heating oil and mogas bounced dramatically off yearly lows, rising 10% last week.
Could the bottom be in on liquid energy and the endless bid on petroleum futures resume its relentless upward march? The answer will mostly depend on the collateral damage that will ensue to euro zone banks on the eventual default of Greek sovereign debt.
The European Central Bank, International Monetary Fund and European leader's are desperately trying to calm market fears by buying up bonds of floundering euro members, notably Greece. The actions appeared to have calmed investors last week as the euro gained versus the US dollar and other currencies.
Will they be able to continue with the bond buying? Juergen Stark voiced his opinion by resigning his executive board position on the European Central Bank. Mr. Stark was furious that the ECB has drifted from its original mandate of fighting inflation to bailing out weak euro countries.
Juergen Stark is not alone in is dissension to fighting the European sovereign debt crisis by running the monetary printing presses. The hard working people of Germany have had enough of seeing their tax burdens increase well into the future in order to fund bailouts for less hard working Southern euro countries. The turmoil among Germans is likely to increase should it become necessary to include Italy, Portugal and possibly even Spain into the bond buying program.
The end result of the European debt crisis is largely unknown. Europe may be able to delay the Greek debt default just long enough to allow Euro zone banks to build enough equity to mitigate collateral damage. Hopefully, this will contain the fallout from spreading into the worldwide banking system.
On the other hand, if euro banks are already too leveraged to build equity quickly over the coming months, there is the possibility that the contagion will spread resulting in a possibly worse banking crisis than was experienced in 2008.
Traders will be best served by tuning in closely to the developments that ensue from European leaders over the coming weeks. When the crisis has finally passed, normal seasonal trends will resume, with the most tradeable and reliable seasonal trend, rising gas futures from early January into April.
Could the bottom be in on liquid energy and the endless bid on petroleum futures resume its relentless upward march? The answer will mostly depend on the collateral damage that will ensue to euro zone banks on the eventual default of Greek sovereign debt.
The European Central Bank, International Monetary Fund and European leader's are desperately trying to calm market fears by buying up bonds of floundering euro members, notably Greece. The actions appeared to have calmed investors last week as the euro gained versus the US dollar and other currencies.
Will they be able to continue with the bond buying? Juergen Stark voiced his opinion by resigning his executive board position on the European Central Bank. Mr. Stark was furious that the ECB has drifted from its original mandate of fighting inflation to bailing out weak euro countries.
Juergen Stark is not alone in is dissension to fighting the European sovereign debt crisis by running the monetary printing presses. The hard working people of Germany have had enough of seeing their tax burdens increase well into the future in order to fund bailouts for less hard working Southern euro countries. The turmoil among Germans is likely to increase should it become necessary to include Italy, Portugal and possibly even Spain into the bond buying program.
The end result of the European debt crisis is largely unknown. Europe may be able to delay the Greek debt default just long enough to allow Euro zone banks to build enough equity to mitigate collateral damage. Hopefully, this will contain the fallout from spreading into the worldwide banking system.
On the other hand, if euro banks are already too leveraged to build equity quickly over the coming months, there is the possibility that the contagion will spread resulting in a possibly worse banking crisis than was experienced in 2008.
Traders will be best served by tuning in closely to the developments that ensue from European leaders over the coming weeks. When the crisis has finally passed, normal seasonal trends will resume, with the most tradeable and reliable seasonal trend, rising gas futures from early January into April.
Sunday, September 4, 2011
The Red Metal Dr. of Economics and Liquid Energy Futures
The science of economics tends lean heavily on the art of forecasting future growth trends. Economists have a slew of carefully crafted computer models that are relied upon to forecast the general direction of worldwide economic growth. A more real life predictor of economic trends with a good track record of reliability lies not in computer models, but in the pricing trend of the world's third most widely used metal, copper.
Dr. Copper has consistently forecasted economic slow downs for many years. The reason is due to its primary use in cyclical applications, such as housing and industrial machinery manufacturing. Quite simply, when we are coming out of a cyclical worldwide growth phase, copper prices will begin peaking and then reverse trend.
Technically, copper has formed a double top. This formation generally, but not always, indicates a reverse in trend is about to occur. Fundamentally, copper supplies have fallen due to strikes and production difficulties in key mines throughout the world. Despite the copper supply shortages copper has had difficulty carving out new highs.
If the slow, but growing worldwide economic models that most economists are relying upon are truly accurate, the price of copper will need to confirm by breaking through the double top and resuming its longer term upward trend. Failure to break resistance will be one of the first real life indicators that the entire world economy is likely headed for a recession.
Liquid energy traders will be monitoring Dr. Copper, adjusting long or short positions to stay ahead of economic growth trends.
Saturday, August 13, 2011
Japan's Recovery and Fuel Demand
Asian country economies have been, with the recent exception of Japan, steady and consistent growth and fuel consuming machines. Japan may reveal that it is back on it feet when this coming Monday they release gross domestic production numbers for Q2.
Japan's GDP data will be an important measure future fuel demand. While economists are expecting a contraction anywhere from 1.4% to 4.7%, any surprise data better than these contraction percentages, will put a bid on liquid energy futures.
Follow up strength or weakness indication from Japan will be given Thursday when they release trade data. Japan grew trade surplus to $900 million in June. If the July numbers continue showing this trade growth, energy futures, particularly heating oil futures, will receive additional support.
Technically energy charts are bearish. $88 provides solid short term resistance for crude. Should this level hold, bears have the opportunity to try to push down to the $70 handle. Should prices continue to fall, end users of gas and diesel will do well to lock in the lower prices, anticipating prices steadily moving higher in 2012.
Japan's GDP data will be an important measure future fuel demand. While economists are expecting a contraction anywhere from 1.4% to 4.7%, any surprise data better than these contraction percentages, will put a bid on liquid energy futures.
Follow up strength or weakness indication from Japan will be given Thursday when they release trade data. Japan grew trade surplus to $900 million in June. If the July numbers continue showing this trade growth, energy futures, particularly heating oil futures, will receive additional support.
Technically energy charts are bearish. $88 provides solid short term resistance for crude. Should this level hold, bears have the opportunity to try to push down to the $70 handle. Should prices continue to fall, end users of gas and diesel will do well to lock in the lower prices, anticipating prices steadily moving higher in 2012.
Saturday, July 2, 2011
Clubbing Oil Futures With the Strategic Oil Reserve
Frustrated with stubbornly high retail gasoline prices, President Barack Obama announced 60 million barrels of crude supply will be made available through a coordinated release of strategic reserve supply in the United States and Europe. The US contribution is set at 30 million barrels. With daily worldwide crude consumption at 83 million barrels, will this release of additional crude supply affect crude spot or futures pricing?
The immediate knee jerk reaction of the market to this announcement was to sell, pressuring the market down from $94 to $89. At the close of floor trading Friday, crude was back up to $95. Has the market shrugged the increase supply? Yes. However, traders need to be cautious discounting government intervention in the energy markets.
Government interventions in markets be it in currency or energy are normally futile efforts. Short term markets will react to the intervention, but longer term fundamentals eventually return. In and of itself the 60 million barrels of additional crude is a small amount. 23 million less than daily consumption. It was the surpise factor that caused the sell off. The buyers returned when better than expected economic data was released later in the week.
It is doubtful Mr. Obama will go away quietly should crude rise above $100. Expect for more intraventions with more strategic reserve crude gallons released until Libya crude production comes back online. Longer term demand for petroleum products will eventually drive the market. In the short term, longs need to be aware that a club is over their head ready to beat down upward price movements.
The immediate knee jerk reaction of the market to this announcement was to sell, pressuring the market down from $94 to $89. At the close of floor trading Friday, crude was back up to $95. Has the market shrugged the increase supply? Yes. However, traders need to be cautious discounting government intervention in the energy markets.
Government interventions in markets be it in currency or energy are normally futile efforts. Short term markets will react to the intervention, but longer term fundamentals eventually return. In and of itself the 60 million barrels of additional crude is a small amount. 23 million less than daily consumption. It was the surpise factor that caused the sell off. The buyers returned when better than expected economic data was released later in the week.
It is doubtful Mr. Obama will go away quietly should crude rise above $100. Expect for more intraventions with more strategic reserve crude gallons released until Libya crude production comes back online. Longer term demand for petroleum products will eventually drive the market. In the short term, longs need to be aware that a club is over their head ready to beat down upward price movements.
Friday, June 10, 2011
OPEC (Oil's Perpetual Enmity Coalition)
Well that was a big waste of time. I am referring to this week's quarterly OPEC (Oil's Perpetual Enmity Coalition) no decision meeting . None the less, a pivotal meeting in several ways.
This meeting used to be a very easy read simply by knowing the OPEC committee meeting's proposal recommendation held the day before, a crude trader would be reasonably sure of the following day full member OPEC meeting concenses results. Unfortunately with the strong rift between Sunni and Shiite sects within OPEC, committee recommendations are no longer guaranteed of receiving approval. This was the reason OPEC was not able to agree on increasing crude production quotas.
Saudi Arabia, (Sunnis), rightly argued that current crude oil production needs to increase 2 million bbls per day to meet projected demand. Iran, (Shiite), realizing that Saudi's crude is of a higher sulfur and more expensive to refine quality, understands that the world does need more crude but not the kind coming out of Saudi Arabia. They along with other Shiite dominated OPEC countries decided not to agree to the production increase.
Several television business commentators were arguing that this infighting ultimately means OPEC is no longer relevant and has lost its power to control crude production and ultimately crude pricing. On the contrary, OPEC is more relevant than ever and will continue to be so until alternative energy sources begin to compete with crude as a transportation fuel.
Saudi Arabia understands that even if they produce more crude, it is of the quality that refiners do not want. What refiners need is more production of lighter sulfur crude produced by Libya and Nigeria. As long as Libyan production remains off line, there is no country having excess capacity that can fill the demand gap.
Barring the entire global economy sinking deeply into a deep recession, CL futures will remain on its endless bid and higher crude prices should be anticipated.
This meeting used to be a very easy read simply by knowing the OPEC committee meeting's proposal recommendation held the day before, a crude trader would be reasonably sure of the following day full member OPEC meeting concenses results. Unfortunately with the strong rift between Sunni and Shiite sects within OPEC, committee recommendations are no longer guaranteed of receiving approval. This was the reason OPEC was not able to agree on increasing crude production quotas.
Saudi Arabia, (Sunnis), rightly argued that current crude oil production needs to increase 2 million bbls per day to meet projected demand. Iran, (Shiite), realizing that Saudi's crude is of a higher sulfur and more expensive to refine quality, understands that the world does need more crude but not the kind coming out of Saudi Arabia. They along with other Shiite dominated OPEC countries decided not to agree to the production increase.
Several television business commentators were arguing that this infighting ultimately means OPEC is no longer relevant and has lost its power to control crude production and ultimately crude pricing. On the contrary, OPEC is more relevant than ever and will continue to be so until alternative energy sources begin to compete with crude as a transportation fuel.
Saudi Arabia understands that even if they produce more crude, it is of the quality that refiners do not want. What refiners need is more production of lighter sulfur crude produced by Libya and Nigeria. As long as Libyan production remains off line, there is no country having excess capacity that can fill the demand gap.
Barring the entire global economy sinking deeply into a deep recession, CL futures will remain on its endless bid and higher crude prices should be anticipated.
Sunday, May 8, 2011
Where Is the Floor on Crude?
Having come just short of targeted $117 crude price goal with a $114.95 high print, is it time to follow short term swing momentum with the bears? It all depends on where the selling on crude will stop and longer term players deem crude a value buy again.
With the US dollar seeming to put in a floor on strong euro selling due to Greece announcing it is considering leaving the 17 nation European Currency bloc, US unemployment climbing to 9% and June oil futures down nearly 15% for the week, it might seem wise to run with the heard and get heavily shorted energy.
Despite the massive sell off this week, Fund managers remain net long on NYMEX crude futures and options. Whatever, the bottom may be on crude; analyst vary between $92 and $94, the one great fundamental supply issue remains with Libya. With worldwide global recovery continuing, demand for crude will continue to rise. Going into early next year, should Libya's crude remain out of the market, tighter supplies will keep the longer term crude bull market securely in place.
It is possible this year's high in crude has been achieved. However, should Libya's supply remain off the market crude prices will easily surpass this year's current high.
With the US dollar seeming to put in a floor on strong euro selling due to Greece announcing it is considering leaving the 17 nation European Currency bloc, US unemployment climbing to 9% and June oil futures down nearly 15% for the week, it might seem wise to run with the heard and get heavily shorted energy.
Despite the massive sell off this week, Fund managers remain net long on NYMEX crude futures and options. Whatever, the bottom may be on crude; analyst vary between $92 and $94, the one great fundamental supply issue remains with Libya. With worldwide global recovery continuing, demand for crude will continue to rise. Going into early next year, should Libya's crude remain out of the market, tighter supplies will keep the longer term crude bull market securely in place.
It is possible this year's high in crude has been achieved. However, should Libya's supply remain off the market crude prices will easily surpass this year's current high.
Sunday, April 3, 2011
Egyptian/Israeli 1979 Peace Treaty in Jeapordy
The Camp David Accords of 1978 with Israel and Egypt resulted in the signing of the the first ever peace treaty by Israel with another Arab nation. The reason for not having any treaties before this time, despite thirty years of turmoil between Israel and its Arab neighbors, is simple. Arab nations hate Israel and refused to even talk to Israel. It was not until Egyptian President Anwar Sadat was smart enough to look past the hatred and focus on the economic well being of the Middle East, that a peace treaty was finally negotiated and signed on March 26, 1979.
Israel made the far greater sacrifice in giving up the Sinai peninsula where Israel was producing oil from the Sinai oil fields. Especially when factoring in today's price for oil. Prime Minister Menachem Begin was criticized severely even by conservative Israeli's for making this and other concessions to secure peace on Israeli's southern border. Prime Minister Begin understood correctly that not having to worry about having to defend its southern border was well worth the cost of the Israeli Sinai concessions.
Egyptian President Anwar Sadat was considered by other Arab countries, and even some in his own country, as a trader for signing the treaty with Israel and was eventually assassinated two years after signing. Upon Sadat's death all Arab countries voted against honoring the treaty. To its credit, Egypt has stood by the peace treaty.
With the recent overthrow of Egyptian President Hosni Mubarak the world is cheering the rise of a democratic style of government in Egypt. The great concern for future stability in the Middle East will be how does the new Egyptian government view the 1979 peace treaty? If the commitments of the treaty are no longer honored by Egypt, look for many years of instability and rising tensions in the Middle East, with the price of crude rising higher with the inevitable turmoil.
Saturday, March 26, 2011
Geopolitical Risk Premium Supporting Energy Futures
The advance in crude futures slowed a bit this week, but the positively sloping trend is clearly intact. Even Portugal's well publicized financial difficulties failed to trigger a sell off in crude or the euro. Energy markets continue to remain fearful of the potential supply disruptions in the Middle East and possibly even Nigeria pricing in a premium on these global risks.
We now have crude poised above $105. A figure it has not seen since 2008. A pull back below $100 is quite possible. However, strong support will come in at $97, should swing traders be fortunate enough to see this number enter their variable algorithmic formulas.
The high probability trade will be to add to long positions on any pull backs and be prepared to ride the volatility to a $117 take profit target.
We now have crude poised above $105. A figure it has not seen since 2008. A pull back below $100 is quite possible. However, strong support will come in at $97, should swing traders be fortunate enough to see this number enter their variable algorithmic formulas.
The high probability trade will be to add to long positions on any pull backs and be prepared to ride the volatility to a $117 take profit target.
Sunday, March 20, 2011
Backwardated Crude Term Structures Evidence Continued Positivley Sloped Futures Trend
Japan's increased energy import needs along with turmoil in Libya, Bahrain, Saudi Arabia, and Yemen, will continue to support higher crude prices. Crude and products pulled back slightly this week on temporary demand destruction from Japan. The reality is that Japan will have to find ways to make up for the 10% of nuclear energy production destroyed by recent events.
Evidence of continued crude pricing strength can be seen in the term structure of Brent crude futures becoming completely backwardated. Even well supplied WTI crude futures have turned backwardated from December 2011 onward. Stronger evidence on higher crude prices are evident on year spreads for WTI and Brent. One month ago the spread was at a $3.51 contango. On Friday this spread has gone to a $1.95 backwardation.
Backwardated pricing will continue to bring crude out of storage and into the market on stronger demand. When near months on WTI futures follow Brent trend, pricing will become even more supported.
If this was not bad enough news for anyone seeking lower crude and refined product prices, Nigeria is scheduled to hold elections in April. The trend on these elections is for rebel troops to destroy pipelines, squeezing supply of valuable light sweet crude and adding additional upward pricing pressure.
Evidence of continued crude pricing strength can be seen in the term structure of Brent crude futures becoming completely backwardated. Even well supplied WTI crude futures have turned backwardated from December 2011 onward. Stronger evidence on higher crude prices are evident on year spreads for WTI and Brent. One month ago the spread was at a $3.51 contango. On Friday this spread has gone to a $1.95 backwardation.
Backwardated pricing will continue to bring crude out of storage and into the market on stronger demand. When near months on WTI futures follow Brent trend, pricing will become even more supported.
If this was not bad enough news for anyone seeking lower crude and refined product prices, Nigeria is scheduled to hold elections in April. The trend on these elections is for rebel troops to destroy pipelines, squeezing supply of valuable light sweet crude and adding additional upward pricing pressure.
Saturday, February 26, 2011
Middle East Uprisings Highlight the Importance of Supply Margin
Crude and its refined products, like any commodity, are ultimately priced on supply and demand. Sounds simple enough. The one complication added to these pricing inputs; expectation of future supply and demand. The sharp run up in crude prices the past few weeks shows how big a role expected supply and demand plays. The one buffer that will temper or exasperate expectations is spare production capacity.
No one really knows for sure how the problems in North Africa and Middle Eastern countries will resolve. We could experience a swift and peaceful change of these governments to stable democracies, continued prolonged unrest, or a combination of the two. What is known is the world is consuming 88 million bbls per day, up 2.7 million bbls per day from last year and expected to grow an additional 1.7 million bbls per day this year. At current crude production rates there are 4 to 5 millions bbls per day of spare capacity.
Even without turmoil in the Arab countries, the rising world demand for crude will cut into spare production margin bringing it down to 3 million bbls per day. Factor in potential production disruptions and the world could easily find itself with fuel supply shortages.
The narrowing of marginal crude production capacity is what is driving crude to multi year highs. Until more crude production capacity is added, or world economies collapse under the weight of higher crude prices, expectations will remain for supply not being able to outpace demand.
No one really knows for sure how the problems in North Africa and Middle Eastern countries will resolve. We could experience a swift and peaceful change of these governments to stable democracies, continued prolonged unrest, or a combination of the two. What is known is the world is consuming 88 million bbls per day, up 2.7 million bbls per day from last year and expected to grow an additional 1.7 million bbls per day this year. At current crude production rates there are 4 to 5 millions bbls per day of spare capacity.
Even without turmoil in the Arab countries, the rising world demand for crude will cut into spare production margin bringing it down to 3 million bbls per day. Factor in potential production disruptions and the world could easily find itself with fuel supply shortages.
The narrowing of marginal crude production capacity is what is driving crude to multi year highs. Until more crude production capacity is added, or world economies collapse under the weight of higher crude prices, expectations will remain for supply not being able to outpace demand.
Saturday, February 12, 2011
Will the Chicago Markets Follow the Deutsche Borse NYSE Lead?
The transformation of global capital markets ramped up quickly this week with the disclosure of Deutsche Borse in talks to acquire NYSE Euronext. Should the proposed merger be approved, the combined entity will dominate derivatives trading in Europe and America and has the potential of dominating stock trading. Germany will become the epicenter of global capital markets.
The driving forces behind the merger are economies of scale and market share. Trading system costs and regulatory expenses will be reduced in direct relation to scale of trading volume. The combined Deutsche Borse/NYSE will be an unassailable global market share growth monster dominating both continents. Costs will be reduced and pricing power will increase as competition evaporates.
How are the Chicago exchanges along with Nasdaq going to compete against this new dominant force? Joining forces and fighting to keep and expand market share appears to be the best solution.
The Chicago Mercantile Exchange already dominates US futures trading. Increased trading volume will have to come from growth in Europe. Nasdaq has an exchange in Sweden, but will find it very difficult to grow in Europe with a combined Deutsche Borse/NYSE.
The Chicago Board of Exchange, CBOE, is the largest US options mart, with several extremely valuable, exclusively traded large volume options. Because of its US options dominance, the CBOE is a very likely, though very expensive, take over target.
A combined Nasdaq, CME, CBOE, with perhaps an Asian exchange added, would make a formidable competitor to a united Deutsche Borse/ NYSE.
Deal makers will probably wait to see if the proposed Deutsch Borse/ NYSE merger becomes reality. If and when it does, additional exchange market merger announcements will be forth coming.
The driving forces behind the merger are economies of scale and market share. Trading system costs and regulatory expenses will be reduced in direct relation to scale of trading volume. The combined Deutsche Borse/NYSE will be an unassailable global market share growth monster dominating both continents. Costs will be reduced and pricing power will increase as competition evaporates.
How are the Chicago exchanges along with Nasdaq going to compete against this new dominant force? Joining forces and fighting to keep and expand market share appears to be the best solution.
The Chicago Mercantile Exchange already dominates US futures trading. Increased trading volume will have to come from growth in Europe. Nasdaq has an exchange in Sweden, but will find it very difficult to grow in Europe with a combined Deutsche Borse/NYSE.
The Chicago Board of Exchange, CBOE, is the largest US options mart, with several extremely valuable, exclusively traded large volume options. Because of its US options dominance, the CBOE is a very likely, though very expensive, take over target.
A combined Nasdaq, CME, CBOE, with perhaps an Asian exchange added, would make a formidable competitor to a united Deutsche Borse/ NYSE.
Deal makers will probably wait to see if the proposed Deutsch Borse/ NYSE merger becomes reality. If and when it does, additional exchange market merger announcements will be forth coming.
Saturday, January 22, 2011
10% Probability of $4.00 Retail Gas In 2011
During an economic recovery, future demand expectations trumps current supply data bidding up futures for crude and refined products. This is why the energy complex has been on a relentless upward trend for the past two years. Seasonal refinery output factors that normally temper price movements have had little effect this year. Why is this happening?
The simple answer is that speculators have gone all in on long positions, taking profits at resistance levels and then repositioning long trades at support levels. This has prevented any sustainable sell off. It has also positioned term structures to move from a well supplied backwardation market to a high demand contango market.
The EIA released gas supply data last week showing gas supplies have been steadily increasing. Despite the ample supply, they are giving a 10% probability that retail gas prices will hit $4.00 per gallon, with a 50% chance of gas prices hitting $3.50 per gallon in 2011.
One hope for consumers is that everyone is leaning heavily to one side of the ship. Should a major demand or several demand reducing events occur in 2011, there will be a lot of traders trying to exit through a small door at the same time. Such an event would be China overshooting on its attempts to dampen its inflation. Another listing of the ship event would be the failure of several Eurozone banks.
Since neither of these events are highly likely to occur, traders will not try to rock the boat and continue positioning for the likelihood of a continued bull market.
The simple answer is that speculators have gone all in on long positions, taking profits at resistance levels and then repositioning long trades at support levels. This has prevented any sustainable sell off. It has also positioned term structures to move from a well supplied backwardation market to a high demand contango market.
The EIA released gas supply data last week showing gas supplies have been steadily increasing. Despite the ample supply, they are giving a 10% probability that retail gas prices will hit $4.00 per gallon, with a 50% chance of gas prices hitting $3.50 per gallon in 2011.
One hope for consumers is that everyone is leaning heavily to one side of the ship. Should a major demand or several demand reducing events occur in 2011, there will be a lot of traders trying to exit through a small door at the same time. Such an event would be China overshooting on its attempts to dampen its inflation. Another listing of the ship event would be the failure of several Eurozone banks.
Since neither of these events are highly likely to occur, traders will not try to rock the boat and continue positioning for the likelihood of a continued bull market.
Saturday, January 8, 2011
Falling Bond Prices Effect on the Energy Complex
Ben Bernanke and the US Federal Reserve are in the process of buying up $600 billion in treasuries in hopes of keeping interest rates low to help stimulate the economy. Bonds, however, are misbehaving. Interest rates on the ten year note is approaching critical technical levels that if broken, will likely set the stage for a secular bear market in bonds. Mr. Market is in the process of breaking apart long held economic theories.
Theoretical economics can be completely mind blowing. Yet no matter how complex the theory, in the long run, it will always need to obey the very simple laws of supply and demand. The acid test of any economic theory is whether or not a hypothetical idea plays out in the market. Ben Bernanke is hoping that injecting $600 billion into the economy buying treasuries will force interest rates down. Yet interest rates are going in the opposite direction. Why? And will this have any effect on the energy market?
The simple answer to why interest rates are heading up instead of down is that money flows are moving out of bonds with fears of future inflation diluting value.
Bonds have been in a secular bull market for the past twenty years. Bond traders are now carefully monitoring two year resistance of 4% on the ten year. Should this level give way the next major line of resistance comes in at 5.5%. A breach of interest rates above 5.5% by either the ten year or thirty year bond will be a strong signal to most bond traders that the long run of the bond bull market is over and a new secular bear market has begun.
If the bond market turns secularly bearish, will this tame the relentless bull market in energy? Probably not much. Upward trending interest rates are not good for any economy. Higher borrowing costs will be past along to consumers. The ultimate result is rising prices; inflation.
Crude oil remains a scarce resource. Light crude oil even more so. Long term continuation of falling bond prices will eventually lead to another recession. This may not happen for several years. Until then, demand for crude and its refined products will continue unabated supporting prices, keeping the secular crude bull market in place for several years to come.
Theoretical economics can be completely mind blowing. Yet no matter how complex the theory, in the long run, it will always need to obey the very simple laws of supply and demand. The acid test of any economic theory is whether or not a hypothetical idea plays out in the market. Ben Bernanke is hoping that injecting $600 billion into the economy buying treasuries will force interest rates down. Yet interest rates are going in the opposite direction. Why? And will this have any effect on the energy market?
The simple answer to why interest rates are heading up instead of down is that money flows are moving out of bonds with fears of future inflation diluting value.
Bonds have been in a secular bull market for the past twenty years. Bond traders are now carefully monitoring two year resistance of 4% on the ten year. Should this level give way the next major line of resistance comes in at 5.5%. A breach of interest rates above 5.5% by either the ten year or thirty year bond will be a strong signal to most bond traders that the long run of the bond bull market is over and a new secular bear market has begun.
If the bond market turns secularly bearish, will this tame the relentless bull market in energy? Probably not much. Upward trending interest rates are not good for any economy. Higher borrowing costs will be past along to consumers. The ultimate result is rising prices; inflation.
Crude oil remains a scarce resource. Light crude oil even more so. Long term continuation of falling bond prices will eventually lead to another recession. This may not happen for several years. Until then, demand for crude and its refined products will continue unabated supporting prices, keeping the secular crude bull market in place for several years to come.
Saturday, January 1, 2011
Will Crude Gain Another 15.1% in 2011?
The year 2010 was a great year for the bulls in almost every market. Equities around the world were higher. Gold, crude, bonds, US dollar, copper, wheat, corn; all paid handsomely to market participants trading long. With the economic recovery continuing to gain momentum, should traders simply repeat 2010 winning strategies, or has the long only trade become too crowded for 2011?
For energy traders the key to future prices heavily rests on future demand. Since the US and China are the two largest energy consumers, an investor's energy demand forecast for these two countries, will largely dictate the proper trade.
China is imposing higher reserve requirement and higher interest costs for banks to slow down growth. The Chinese government will likely be successful slowing growth. Still, they will likely continue to see GDP growth at 8% or better in 2011.
One other important factor in China's crude consumption overlooked by many is China's desire to build greater emergency reserve capacity. I like to call this factor the Chinese put. When crude prices dipped down into the $70's handle last summer, crude tanker shipments into China increased. Why? China has become an astute energy trader. They were busy buying up all available crude at cheaper prices and placing the barrels into emergency storage. They will repeat this exercise on any major market downturn, effectively giving long traders a free stop loss put.
With all the talk about China, the United States is still the number one consumer of crude, gas and diesel. Should the US fall back into another recession this year, energy prices will be affected dramatically. Unlikely as this might be to happen, traders will need to keep monitoring events in Europe that would have the potential to derail the US recovery. The problems with several Euro member sovereign debt are real and they are serious. If the debt is not handled in a real and serious manner, banking collapses will cause worldwide economic pain.
With demand finally chipping away at supply, crude, gas and diesel futures term structures are moving decisively from a contango market to a backwardation market. It is almost never wise to be short any commodity that is in contango, as products are coming out of storage and being sold decreasing forward supply.
Crude bears reading this may be screaming that the falling euro and strengthening US dollar is being left out of my 2011 forecast. And the bears are likely to be correct in this currency trend continuing in 2011. The stronger US dollar will help to alleviate a quick rise in crude to $149. However, 2011 is likely to be a year that breaks past correlations, with equities, commodities and the US dollar all rising together. Remember, currencies are driven by interest rates. US interest rates are on the rise.
In 2011 we may see crude gain 10% to 15%. Should the market give up some ground, traders should take advantage and add to long positions knowing the Chinese put is in place.
Happy New Year everyone!
For energy traders the key to future prices heavily rests on future demand. Since the US and China are the two largest energy consumers, an investor's energy demand forecast for these two countries, will largely dictate the proper trade.
China is imposing higher reserve requirement and higher interest costs for banks to slow down growth. The Chinese government will likely be successful slowing growth. Still, they will likely continue to see GDP growth at 8% or better in 2011.
One other important factor in China's crude consumption overlooked by many is China's desire to build greater emergency reserve capacity. I like to call this factor the Chinese put. When crude prices dipped down into the $70's handle last summer, crude tanker shipments into China increased. Why? China has become an astute energy trader. They were busy buying up all available crude at cheaper prices and placing the barrels into emergency storage. They will repeat this exercise on any major market downturn, effectively giving long traders a free stop loss put.
With all the talk about China, the United States is still the number one consumer of crude, gas and diesel. Should the US fall back into another recession this year, energy prices will be affected dramatically. Unlikely as this might be to happen, traders will need to keep monitoring events in Europe that would have the potential to derail the US recovery. The problems with several Euro member sovereign debt are real and they are serious. If the debt is not handled in a real and serious manner, banking collapses will cause worldwide economic pain.
With demand finally chipping away at supply, crude, gas and diesel futures term structures are moving decisively from a contango market to a backwardation market. It is almost never wise to be short any commodity that is in contango, as products are coming out of storage and being sold decreasing forward supply.
Crude bears reading this may be screaming that the falling euro and strengthening US dollar is being left out of my 2011 forecast. And the bears are likely to be correct in this currency trend continuing in 2011. The stronger US dollar will help to alleviate a quick rise in crude to $149. However, 2011 is likely to be a year that breaks past correlations, with equities, commodities and the US dollar all rising together. Remember, currencies are driven by interest rates. US interest rates are on the rise.
In 2011 we may see crude gain 10% to 15%. Should the market give up some ground, traders should take advantage and add to long positions knowing the Chinese put is in place.
Happy New Year everyone!
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