Energy Markets Could Find Home in the Range: Will Crude Oil Prices Continue to Cool off This Year or Is the Recent Pullback a Brief Correction in Another Long-Term Bull Move? While Opinions Differ on Predictions for the First Half of the Year, the Consensus Is Price and Volatility in Crude Oil, and Other Energies Will Not Live Up to What We Witnessed in 2005

By Bauch, Carla M. | Modern Trader, February 2006 | Go to article overview

Energy Markets Could Find Home in the Range: Will Crude Oil Prices Continue to Cool off This Year or Is the Recent Pullback a Brief Correction in Another Long-Term Bull Move? While Opinions Differ on Predictions for the First Half of the Year, the Consensus Is Price and Volatility in Crude Oil, and Other Energies Will Not Live Up to What We Witnessed in 2005


Bauch, Carla M., Modern Trader


While a few experts predict we will revisit $70 per barrel crude oil in 2006, many analysts expect energy prices to stabilize during the first half of the year. Predictions of crude oil prices in the mid to high $50s are the norm as analysts call for range-like markets instead of the trending markets energy traders have came to know so well.

Vikram Patel, senior technical analyst for Informa Global Markets, explains, "A top is in place and we are not going back to these levels any time soon." Patel reminds us the largest gain is often at the end of a bull market. From approximately May to August of last year, the price of crude oil rallied $25.00. "This is the largest dollar increase in the shortest time frame," Patel says. He points out the retracement levels of $46.20 and $70.85--the later reached in August 2005 after Katrina hit the Gulf of Mexico--lead to a 61.8% retracement of $55.40. After seeing two solid Fibonacci levels intersecting at the same point, Patel forecasts the price of crude will hold above $55.00 through June of this year, but not head north of $70. "We are not in a trending environment. We expect to see range trading up to May or June of this year," Patel says. (See "Less volatility for crude," below).

Jamal Qureshi, lead analyst of PFC Energy's oil market group agrees crude will settle into a trading range the first half of this year. "We see significant changes due to the fact that we have reached a multiyear high in prices," Qureshi says. As an average for the year, Qureshi expects crude to trade in the upper $50s. More specifically, he sees price ranges between $57 to $59 during the first half of this year and around $54 during the second half. Qureshi points to hedge fund activity as a telling tale of crude's sentiment. "Hedge funds are not automatically bullish. They are now inclined to play both sides," he says.

This year instead of focusing on how high crude will climb, analysts are debating what the low for the year will be. "The mission in 2006 is to find what the floor price is," explains Tim Evans, senior energy analyst, IFRMarkets.com. Evans explains there is inherent tension in the relationship between high stock prices and high energy prices. "They don't normally go together and this is a serious bearish fundamental risk for the crude oil market," Evans says.

Tom Bentz, energy analyst with BNP Paribas Commodity Futures, Inc., sees crude oil's drop as a correction that could make its way to $45. Prior to crude seeing a bit of a topping action in mid December, Bentz would have predicted crude to retest recent lows of $55, but after the commodity spiked a bit Bentz sees $45 to $47 as a downside target area. However, Bentz explains, "The long term trend is still up. We could see a correction down to $45 and then we are probably looking for the beginning of the next leg up that could last for two to three years."

DEMAND'S INFLUENCE

A bigger question than where the price will fall to is how much will demand grow in 2006. In mid December the International Energy Agency (IEA) said global demand for oil would amount to 83.4 million barrels per day in 2005 and 85.2 million barrels per day in 2006, adding that world demand growth for 2005 would end up at 1.4% and estimated demand growth for 2006 at 2.2%. In 2004, the market experienced a much larger demand growth of 3.8%, with a demand of 82.2 million barrels per day. (See "World oil demand growth," page 28). "Somehow we take 3.8% demand growth in oil consumption as if the world is coming to an end, when really it is not that much of a stress on the system," Evans says. However, Evans notes this year's high prices may very well dampen growth. Evans expects the market to be the final judge. "I don't think we are going to see 3% demand growth unless we see $30 per barrel crude. If the price stays up here we won't see strong growth. The price has to go to a lower price level to get demand growth back. …

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Energy Markets Could Find Home in the Range: Will Crude Oil Prices Continue to Cool off This Year or Is the Recent Pullback a Brief Correction in Another Long-Term Bull Move? While Opinions Differ on Predictions for the First Half of the Year, the Consensus Is Price and Volatility in Crude Oil, and Other Energies Will Not Live Up to What We Witnessed in 2005
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