Energy Markets: Boom or Bust?

Harvest is done, Thanksgiving is approaching quickly, and questions about pre-buying fuel are flowing in.

Most popular: “What’s around the corner for the oil market?” Lately, the energy market feels like a blind corner, especially following the mid-term elections and a further round of quantitative easing by the Federal Reserve’s Federal Open Market Committee.

The Fed announced another $600 billion in U.S. bond purchases which brought our dollar index to a six-month low vs. the euro. This weaker dollar has made most commodity markets into a bottle rocket.

Metals, grains, and energies have all traded above or close to yearly highs. There is still an undertone with global demand and growth prospects, but the primary focus is still the dollar. Long term, I expect the dollar to tightly control commodities.

Fuel inventories, despite some erosion this fall, remain high after building stockpiles to record highs in August and September. In supply and demand terms, that should signal weaker markets.

However, markets are globally traded, and the record demand from China and India offsets the high U.S. inventory. Global demand coupled with the weaker dollar should put a floor under the markets. For now, that floor seems to be $80 for crude.

Long-term expectations for volatility remain high. Some market participants do not care which way the markets move as long as there is volatility.

In a recent study, the CME Group announced that algorithmic or automated trading systems have increased in use for their markets.

It disclosed that during the third quarter of this year, automated trades in its markets totaled 45.61 percent of the total electronic volume.

Foreign exchange traders accounted for 67.73 percent; Energy traders accounted for 33.77 percent.

The CME Group also suggests that, on average, increased proportions of algorithmic trading-sourced volume and message traffic tend to be associated with enhanced liquidity and reduced volatility. Its statement has some validity, but we still feel the markets will see wide fluctuations.

In May of 2010 the energy markets did something unusual. Oil made a new high and a new low in 16 days. This new low was completely unexpected and went against energy futures seasonal patterns.

Just because this happened once does not change my philosophy. Looking back at seasonal patterns, this year included, the pattern does not change much and spring purchases still look like a win in my book.
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Brian Hartman is GROWMARK’s energy analyst. His e-mail address is bhartman@growmark.com.