by: Jeannette Rohn Showalter, CFA
February 8th, 2012
Crude is one of the most heavily traded futures markets and its pricing reflects a lot of what is happening in the world economy. It is teetering at close to $100. There are plenty of reasons why crude can go higher.
During 2011, crude traded as high as $114 and as low as $76 (OEC data retrieval). The high in 2011’s optimism was in late spring when world GDP looked rosier; the low was in the fall when the fear that Europe would have a melt down and demand would fall off a cliff was greatest. And Europe could still have a melt down and prices fall again but there are some possible reasons why crude could see triple digit pricing in 2012.
Per ABC’s online coverage of the American Petroleum Institute’s recently released data, “…crude inventories fell 4.5 million barrels last week while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted an increase of 2.3 million barrels.” But that immediate inventory data does not reflect some of the looming large elements of the macro picture. (February 8, 2012, “Oil Rises to Near $99 After US Crude Supply Drops”)
And, of course, Iran is in the middle of any macro oil discussion. There is a broad strategy underfoot by the US and the EU to pressure Iran to drop its, believed to be, program of developing nuclear weapons. The EU plans an oil embargo this summer. But, Iran, wants to beat them to the punch: Iran is now planning to halt crude exports to Europe…before the EU has lined up alternative sources of supply. (ABC online news, February 8, 2012, “Oil Rises to Near $99 After US Crude Supply Drops”)
Iran is also (indirectly and directly) threatening to cut of the critical Straits of Hormuz. “Iran exports around 2.5 million barrels per day of crude oil, with 65% of this going to Asia, and some 30% into Europe… A significant portion of the 1.3 million barrels per day of Iranian crude oil imported by IEA member countries is likely to be affected by these measures, but the full impact of the sanctions and embargo have yet to be fully assessed.” (International Energy Agency, February 2, 2012, “How long cans the apparent stability in oil prices last”)
As written in the Globe and Mail, January 4, 2012, “The real story …is not the threat of supply shocks, but the sheer, unrelenting rise in world oil demand. Already closing in on 90 million barrels a day, the quick rebound in world oil consumption to new record highs demonstrates the global economy can’t grow without burning greater amounts of oil.” (“What do triple-digit oil prices mean for growth?” by Jeff Rubin)
These bullish-for-crude-prices thoughts are seconded by a Goldman Sachs analyst: "We continue to expect that oil demand will grow well in excess of production capacity growth," Goldman Sachs said in a report. "It's only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand." (ABC online news, February 8, 2012, “Oil Rises to near $99 After US Crude Supply Drops”)
“Effectively exhausted” are strong words. They are backed up by Ambassador Richard Jones, recently addressing the US Senate Committee of Energy and Natural Resources on oil market developments, “(...the IEA] estimates that the proportion of total world GDP dedicated to oil expenditures was back up above 5% for 2011, as it was during the economic slump of 2008 and during several previous periods of severe economic downturn.” (International Energy Agency, February 2, 2012, “How long can the apparent stability in oil prices last”)
So, if you are looking for a smooth ride in crude this year, you might double think that. But that might provide opportunities for trend following trading systems as they need strong trends for profitable trading. But there is no forecast of crude prices to be made here. WWFS embraces trend following systems specifically because they do not project prices; these systems react to price trends.
Crude is traded in the Bald Eagle Survival Plan, Mini Survival Plan, and Diversified Commodity Basket.
Crude Oil Chart
Regards,
Jeannette Rohn Showalter, CFA
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239-571-8896
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