People have been calling oil "black gold" at least since the days of Beverly Hillbilly Jed Clampett. Today, though, it really is; and that fact marks the multi-billion-dollar migration of investors from equities to commodities that has brought a bit of chaos to the energy trading patch.
"With the dollar going down you see a massive move from equities over into what I call gold-standard crude oil. There's two reasons to buy gold, [and] the biggest reason is to store value," Jim Duncan, ConocoPhillips Gas & Power's director of market analysis, told a Houston audience last week.
Investors seeking returns not currently offered by equities are but one factor shaping the energy markets today, Duncan said, noting a $170 billion migration into commodities. Other factors are weather, political intrigue, inventories and the perceptions and realities of current economics. "This market is probably the strangest...I've been doing this a long time...It is obvious that this market over the last 12 months has dramatically changed from its character even a year ago."
As for weather, there was a time about five years ago when traders were largely content to rely mainly on the latest eight- to 10-day forecast, Duncan told attendees at AccuWeather.com's annual Hurricane Summit. Now, though, traders are living from one daily noon update to the next. "If there are key cities above or below a certain point, they'll buy it; they'll buy it with a vengeance like they're angry," Duncan said. "This is violent buying, and if you haven't seen it on ICE [IntercontinentalExchange], then you're not watching."
Markets also have become more sensitive to any hint of political conflict. "I have never seen a market where I can go home on Friday night, come back on Monday; somebody in Nigeria pulled out a pistol and the market went up," Duncan mused. While events abroad seem to matter more, commodity inventories are mattering less as reports of high commodity prices create a self-fulfilling prophecy, he added.
Duncan said it was last December when he started hearing media reports about $5 gasoline to come. "Where did that come from?" he asked, noting that inventories were robust. He blamed the "CNN effect" for the subsequent run-up in gasoline prices.
Economics, perceptions about supply and demand and a quest for higher returns by investors have made for skyrocketing commodity prices, not just in energy, Duncan said. Unwarranted supply fears also play a role. "We have got the world scared to death that they have got the last hydrocarbons in their gas tank, that they are burning the last molecule. We are not going to run out...the reality is we're not going to run out in your lifetime; we're probably not going to run out in your child's lifetime. To scare people is really, really a problem," Duncan said.
Still, what Duncan called "shortaphobia" pervades the markets. "Nobody wants to be the first one to be short. Everybody wants to be the third. It's holding this market up." His short-term outlook for natural gas is $10. "As soon as we're out of demand I expect things to fall," he said. "How far are they going to fall? Probably 10 bucks. There are a lot of resting buy orders there."
As for enticing traders to take and hold short positions in the market, that will take some signs of strength in the dollar, Duncan said. "The second thing it's going to take is a preponderance of oversupply," he said, noting that "nobody seems to want to believe" Energy Information Administration statistics showing 2-3 Bcf/d more of domestic supply since about November.
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