The Weekly Report: Energy Prices in 2011 (Part III)

23 December 2011


We’ve explored the impact of global geopolitical and natural events on energy markets this year, as well as how several key developments in the U.S. have affected pricing. This article will focus more on the actual prices themselves, delving into some very light technical analysis so that we can gain more understanding of how price action unfolded this year in Crude Oil and Natural Gas.

CRUDE OIL

WTI Crude Oil (CL) cash contracts for immediate delivery had a very interesting and volatile year.

CL began the year at $91.55 a barrel, reaching a high of $113.93 on April 29th. However, prices dropped precipitously from there, and within 7 days prices were at $97.18, or a drop of 17%. This set the tone for most of the rest of the year, as we saw two other very large declines: 25% between July 26th and August 9th, and 19% between September 13th and October 4th, when CL made the year’s low at $75.67 ($38 dollars below the year’s high).

The July-August drop was driven in large part by the debt ceiling crisis in the US, while later year volatility had much to do with Greece and the Sovereign Debt Crisis in Europe.

However, traders who went long at critical turning points also captured quite a few upside swings, including close to five 15%+ jumps in price. Admittedly, the downside swings were larger than the upside ones. However, crude made 19 new highs this year versus 13 new lows; in other words, it made almost 50% more new YTD (year to date) high records than YTD low records. It should be noted, however, that most of the new highs were in the first half of the year.

Nevertheless, there is no ignoring the fact that crude has crossed the critical psychological and technical level of 100, several times this year.

Volatility, as measured by the Crude Oil Volatility Index contract on the Chicago Mercantile Exchange, was substantially higher than in 2009 and 2010, but very far off 2008 peaks. Crude Oil Volatility peaked at 69.12 this year, on November 11th, having increased 61% in 3 days. This is 56% higher than 2010’s peak of 44.3, and 31% higher than 2009’s peak of 52.6. However, it is 28% lower than 2008’s volatility peak of 95.9 from December of that year, which is one of the (if not THE) highest levels it has ever been.

While it has definitely been the most volatile year since the Lehman collapse, overall sentiment is tilting to the upside on the back of stabilizing and moderately positive economic trends in the U.S. and increased demand in both emerging markets as well as the U.S. Europe continues to cast its long shadow over the oil markets, just as it has over all global markets. However, perceived geopolitical risk, specifically prospects of military conflict with Iran (and Iran’s ability to block the Strait of Hormuz which is a major shipping corridor for oil), as well as a robust demand picture should provide a floor for crude prices in 2012.

NATURAL GAS

Henry Hub natural gas cash contracts for immediate delivery (NG) also had a fairly volatile year, with mostly downside momentum due to increasing supply and production in the U.S., where pricing discounts to both Europe and Asia benchmarks became even more marked.

NG experienced its year to date high on June 10th, peaking at 4.915 on extremely hot weather and a moderate but short lived decline in inventories. The contract experienced seven spikes where the price would rapidly go up 10% to 20% in a week, and conversely, nine sharp declines where the price could drop between 15% and 30%.

‘Natgas’, or ‘Natty’ as it’s also called, experienced 8 new YTD highs and 31 new YTD lows, with a very clear and slow motion down trend in the second half of the year. Unlike crude, natural gas is definitely in bearish territory. NG is almost 40% off its YTD highs, while crude is 13% off. New lows are almost 4 times the number of new highs.

Several analysts suggest that we could see some more spikes going into the coldest part of winter, but with unseasonably warm weather prices seem likely to remain depressed for some time. Cheniere’s multibillion dollar LNG deals as well as a bipartisan plan to increase availability of CNG for commercial vehicles offer some light at the end of the tunnel in the medium term, but again, there is little reason to expect steady or sustainably high prices in U.S. markets. However, prices in markets abroad, especially in Latin America and Asia, are expected to hold the lines and perhaps even increase, especially as China begins importing more LNG.

CONCLUSION

Increasing crude prices could have recessionary effects on the global economy but could also bode well for Trinidad, especially if the smaller more recent companies who are seeking to boost production from mature or marginal fields are able to succeed in that endeavour. Global estimates for prices next year are also expected to be somewhat higher than what the Minister of Finance proposed in the National Budget for next year.

Natural gas trends in the U.S. are bearish but ultimately increasing gas exports to Asia while provide better prices and higher volumes for Trinidad. The Chinese sovereign fund’s acquisition of a 10% stake in Atlantic LNG will only help cement and accelerate that trend.

Service companies and producers can be expected to benefit as well, and Firstline Oil Notes Ltd (FONL) are good, moderate risk investments that provide exposure to increased activity in the sector. Find out more when you send me an email at michael.cooper@nullfirstlinesecurities.com

Michael J Cooper
Trading & Strategy Consultant

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