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!