Clearing the View on Energy: Geopolitical, Fiscal and Economy Driven Demand Questions Remain for Oil, Natural Gas and Other Energy Products, While the Supply Outlook Appears Increasingly Positive

By Burgert, Philip | Modern Trader, February 2013 | Go to article overview

Clearing the View on Energy: Geopolitical, Fiscal and Economy Driven Demand Questions Remain for Oil, Natural Gas and Other Energy Products, While the Supply Outlook Appears Increasingly Positive


Burgert, Philip, Modern Trader


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The 2013 energy outlook still is cloudy for traders and analysts as the U.S. and global fiscal and economic situations remain volatile, but traders and analysts generally expect stable or slightly higher prices in the first months of 2013.

Factors that they cite in their outlooks include still-muted economic growth in the United States and recessionary conditions in Europe and Japan, along with emerging economies like China, India and Brazil that will depend on demand from elsewhere to drive growth.

Natural gas prices can be expected to stay in a range from $3 to the upper $4 range under a normal weather scenario, predicts Kyle Cooper, managing director of research at Cypress Energy Capital Management LP. Cooper says crude oil--without any geopolitical crisis such as an Israel-Iran conflict--should maintain a $15-$20 range centered in the upper $80 area. Gasoline, he adds, is to a large extent range bound near current wholesale pricing levels. "Right now the market is pretty close to fair value. The market is relatively well balanced," Cooper says.

Generally higher oil and natural gas prices, however, is the forecast of Spencer Patton, chief investment officer of Steel Vine Investments. "Assuming the fiscal cliff does get resolved, crude oil likely has put in a low ($77.28) that I don't think it's going to revisit any time soon," he says. "I expect it's going to be working its way higher as we work toward some level of recovery."

Patton points to technical bottoms (see "Failed retest" right) that were seen in crude oil on Oct. 4, 2011 and June 28, 2012. "In early November we got to $84, but we didn't get anywhere near [those two lows]. That's something important from a technical standpoint to see that there really is support below $79."

Higher West Texas intermediate (WTI) and Brent crude oil prices also are the forecast of INTL FC Stone Analyst Edward Meir. "Beyond January we should have a pretty decent market," he says. "It's not going to be a runaway bull market, but there will be higher trading ranges for these complexes, mainly because U.S. growth should pick up."

Recent lack of significant domestic energy demand growth when coupled with the U.S. steadily becoming self-sufficient in energy production can be viewed as factors keeping price spikes in check, according to Mike Zarembski, manager of futures trading for options Xpress. "However, we have not seen prices move significantly lower given the above average inventories of oil in the U.S. because of a 'permanent' risk premium market participants have placed on oil prices due to possible output disruptions by major producing countries," Zarembski says.

Geopolitics

The biggest ongoing risk premium continues to come from the Iranian nuclear weapons development questions and how Israel will respond. "It's very difficult to ascertain what [Iranian President Mahmoud] Ahmadinejad is going to do," Cooper says. "He's actually calmed down his rhetoric significantly in the last few weeks."

The risk, he adds, is whether or not Israel will mount an air strike against Iran. "That definitely would provoke and spin off a very significant price spike," Cooper says, adding that such a spike would likely not last long. "While Iran might be able to shut [the Hormuz Strait] down for a day or [two], I don't think they have the capability to shut it down for weeks or months. The U.S. Navy would put an air blanket over the coast of Iran and around the Straits of Hormuz so tight that a mosquito couldn't take off."

Estimates of how much premium in oil prices comes from Iran vary widely, with Patton placing it currently at $5 to $6 per barrel while Meir places it at $15 to $20.

Meir notes that Israeli Prime Minister Benjamin Netanyahu said in the fall that no action would be taken by Israel against Iran before the spring.

Large increases in U. …

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Clearing the View on Energy: Geopolitical, Fiscal and Economy Driven Demand Questions Remain for Oil, Natural Gas and Other Energy Products, While the Supply Outlook Appears Increasingly Positive
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