2008 New Years Report – Energy
The energy markets have got a lot of the focus that commodities got last year. The emerging commodity interest has been bombarded with a bullish energy market, especially crude oil, the favourite of all bulls. The present world situation is such that a change in the energy market, from a bull to a bear, is unlikely. The only bearish moments could be some temporary corrections.
Ethanol
After having reached the lowest price since August 2005, ethanol prices began to move upward in October 2007. The price ceiling for ethanol is the area around 4.23 USD that was reached in June 2006. Since then ethanol fell to around 1.51 and is now at around 2.30, or almost 2 dollars from the top. The move now can largely be credited to the new energy legislation in the US, where ethanol will be playing a big part in the country's future energy policy. But it’s not just the US that will be pushing the price of ethanol to new highs. Many of the emerging markets will be looking for alternatives to oil as the demand for energy increases. Countries like China and India, where increasing part of the population is getting above average standard of living, will be pressing the demand for energy ever higher. Car usage is expected to multiply in China alone, with demand exceeding the demand in the US. Energy sources are limited and an alternative to oil is needed. Ethanol is now the only practical alternative to oil based energy products for transportation. And now with the US setting the focus on ethanol, other countries will follow. This demand will most likely be looking at sugar based ethanol production as most countries will be looking towards Brazil for assistance and advice to setting up their own ethanol production. In Brazil more than half the car fleet is ethanol or hybrid, making them a leading nation in the matter. Other nations will also be feeling more comfortable in consulting them as that will be more on an equal basis, rather than looking towards the US. One other thing that plays a big part in this, is the fact that the US has been basing their ethanol production on corn, a food commodity, but this has been seen as a political incorrect behaviour and quite unpopular for example in Mexico, where higher prices of corn has hit the taco business. Politicians who know the story of the women of Paris marching on Versailles demanding bread, don’t want Mexican housewives marching in demand for tacos. Other food commodities are scarce and it will not be practical to use them for energy production. Sugar on the other hand is plentiful, grows both in the cold and worm areas in the form of sugar cane or sugar beats and is considered a “bad” food substance, making sugar the ideal candidate for ethanol production. We believe that 2008 will be a year of huge increase in the price of ethanol, a move that will be supported by high oil prices.
Natural Gas
The price movement for natural gas, has been similar to the price of ethanol. After having topped in 2006, the prices went down to less then half of what it had been, and since has not been able to break through a resistance of around USD 8.30 though it seems that the market is rather more bullish than bearish. As 2008 will most likely be run by the bulls, when it comes to energy, natural gas can be expected to move towards higher prices at least as a spill-over effect from the other energy products.
Gasoline
Even though the price movement of the gasoline has followed that of the crude oil, it still has not taken the same leap as the crude oil the last weeks. Gasoline is a by-product of crude oil and as such will follows the crude oil prices. We expect the price of gasoline to show the same correlation to crude oil prices, as it has done until now.
Heating Oil
Heating oil correlates even more to the price movement of the crude oil, than does gasoline. As such we expect 2008 to be a bullish year for the heating oil.
Light Crude Oil
If gold was the favourite metal for the year 2007, crude oil was by far the most popular energy product, even the most popular commodity of the year. After having traded in a sideways tunnel around the USD 70 mark in 2005 and 2006, even dropping down to around USD 50 in January 2007, crude oil prices began to move aggressively upward hitting the USD 100 mark on the 2 of January when one contract was sold at USD 100. A 100 % increase in the price in one year does say something about the bullish nature of crude oil. This bull has run far and fast, indicating a possible need for a cooling period. We’ve published some crude oil analysis and did expect a cooling period to precede the USD 100 mark. A downward move to around USD 87 followed, but we did expect a possible move to around USD 80 and even USD 75. But the longer the price maintains within the USD 90 to 100 range, the more unlikely a drop will be. If the price does not manage to close below the USD 90 mark. The cooling or correction will be in the form of a horizontal trading range. But even though we expect the crude oil to take a pause, it does not mean that we think the bull run to be over. On the contrary we believe the prices of crude oil will continue to be high and rather move towards higher prices than not. The year 2008 will not see a permanent drop in oil prices, even though a correction is possible in some form or other.
