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Recent
Trading Strategy
For the better part of a year a popular trading play has
been "spread trading" between the U.S. dollar index and crude
oil. Traders make money as the price spread between the
commodities widens. In this case, traders sell down the value of
our currency, and buy crude oil. Since crude oil is a global
commodity traded in U.S. dollars, a weaker dollar means it takes more
dollars to buy the commodity and the price of crude goes up. The
falling dollar also sparks inflation fears and additional traders step
in to buy crude oil as an inflation hedge. This secondary effect
has also helped push crude oil prices higher. The spread
strategy has worked well for traders but a declining
dollar and rising energy prices are ultimately a recipe for
disaster for the U.S. economy. In recent days,
the New York Mercantile Exchange has increased margins requirements for
several commodities that have suspiciously soared with little change in
their market fundamentals. The higher margins appear to be
driving some of the weaker hands out of the market and prices for
commodities such as silver and gasoline have plummeted. This
action by the exchange and the resultant price declines make a strong
case that it is speculators causing these soaring prices.
Independent Energy Consultants applauds the Exchange for taking
decisive action. Our economy is still trying to recover from a
recession brought on by high commodity prices and the last thing we
need now is a return to the conditions of June 2008.
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Your Energy Manager
Topic: Understanding
Commodity Relationships |
Welcome,
Independent
Energy Consultants, Inc. is committed to helping its clients make well-informed
and cost-effective decisions regarding
their energy supply and consumption. We are sending you this newsletter
to help you understand how decisions made, or not made, affect your
company's bottom line.
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Natural
Gas and Crude Oil Markets Diverge
Several
years ago we saw natural gas trade in line with crude oil and we
watched both soar to all-time highs. The strong positive
correlation between natural gas and crude oil was commonly attributed
to things like soaring demand for both in the emerging markets of India
and China. Other pundits talked about how natural gas prices were
soaring because it was an alternative fuel for crude oil refined
products like heating oil. Independent Energy Consultants didn't
give much credence to those theories then and we do not now. We
believe the run ups were a result of speculators seizing control of the
commodity markets and flooding them with money from the equity
markets. Natural gas and crude oil were swept along
as part of a larger commodities bubble, the likes of which we had
not seen since the 1970s. Market fundamentals were set aside and
momentum traders capitalized on fears being spun by large investment
houses on Wall Street and financial show commentators. Daily
calls for $200-$400/barrel oil created a self-fulfilling prophecy -
until the world-wide economy could bear no more. And as with any
bubble, prices came down further and faster than they went up.
Since
the burst of the commodities bubble (began in July 2008), crude
oil and natural gas have gone their separate ways. In
fact, a popular trading play in the past year has been to sell
natural gas and use the proceeds to buy crude and then reverse the
trades when it was time to take profits. The two commodities,
once strongly positively correlated, have become negatively
correlated. Crude oil, as predicted several months ago by
Independent Energy Consultants, has topped the $100/barrel mark.
Natural gas, conversely, remains low and range bound between $3.80 -
$4.50/Dth. We could write volumes on all the market fundamentals
and technical factors that go into moving these energy prices, but
that's not the point we're trying to make in this
newsletter. The point we're trying to illustrate is not
to fall in love with any particular theory and
don't ever think you've finally got the markets figured out.
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Resist the Temptation
With natural gas and electric prices (which are
highly positively correlated) still trading at 5-7 year lows, it is
likely that many customers will be presented
with unsolicited offers or renewal/extension offers from
their current energy suppliers. These offers may appear attractive, but
we encourage clients to resist the temptation to act impulsively. We
believe it is always a good idea to test the market and have
suppliers compete for your business. Independent Energy Consultants
offers the following observations as to why it is not in your best
interest to accept an unsolicited offer:
- We have
brokered offers from suppliers that are considerably lower than their
unsolicited offers on the same accounts under similar market conditions.
- Suppliers
change their view of the forward energy markets, or the cost structure
of their portfolio can change. When events like these occur, we see a
shift in which suppliers are providing the best price in the market.
- We know that
online auctions facilitated by Independent Energy Consultants on the
WorldEnergy Solutions Exchange create fierce competition for our
clients and squeeze supplier margins more than any other sourcing
technique.
Let
us show you how our proven sourcing process can provide the
supplier liquidity, market discovery, price transparency, analytics and
audit trail you need to make wise energy sourcing decisions.
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