Crude oil scenarios
Bearish: lower prices
Bullish: raise prices
Neutral impact on the commodity price
1. Weather- US forecasts for September call for high temperatures across the “southern tier” states with seasonal temperatures to the North and in the Northeast.
Bearish, the north and northeastern states are not experiencing changes in seasonal temperatures so the demand in that region is unmoved and higher temperatures in southern tier states would decrease demand for heating oil over a region with lower consumption comparatively.
2. Domestic Economy- The Institute for Supply Management’s August manufacturing index was 52.5, down from July’s 53.1.
Bearish, the down movement on the manufacturing index can be seen as an indicator that the demand for oil will also see a decline because of the reduction of strength in this economic sector
3. Global economy- Europe continues to wrestle with the financial woes of Greece and Spain. China sees large increase in exported goods.
Bullish, the health of the Eurozone is precarious with Greece and Spain suffering continued financial difficulties but the adverse economic factors in this region is strong enough to keep prices low against China’s robust economic growth and increased oil demand to move their exports.
4. Currency- The US Dollar traded lower against the British Pound and the Japanese Yen today.
Bullish, with a weak US dollar compared to the currencies of Britain and Japan, investors in other nations will see an opportunity to buy and trade crude contracts and get more for their money therefore increased foreign demand will drive crude prices up. US markets will try to offset a down exchange rate with higher crude prices.
5. Geo-political situations- The US Navy has successfully thwarted a Somali pirate takeover of a million-barrel crude oil tanker in the Gulf of Aden. OPEC decides to maintain current voluntary quotas.
Neutral but possibility bullish, despite OPEC’s decision to maintain voluntary supply quotas and the victory over a Somali pirate attack it is likely that if there is any movement on crude prices that we could expect to see a speculative price increase as the threat of this attack creates a climate of apprehension and supplies could be compromised if the quotas were lifted.
6. Cross-commodity markets- The “peak” summer driving period is over but Americans drove 10% more miles than last summer.
Bullish, an increase in off-peak gasoline consumption signals a strong demand for this crude product and will raise prices on available supplies.
7. Changes in inventory- The Energy Information Agency’s Weekly Crude & Distillates Report showed that 1.5 million barrels of oil were added to the nation’s storage facilities last week.
Bearish, increases in supply added to the nation’s storage facilities will lower prices to incentivize demand
In my overall view, the market is bullish on these factors and I would sell some crude contracts to capitalize on increased price movement. I would want to act before supply inventories increased further and while consumption levels were favorable. OPEC’s decision to hold quotas and the weakness of the U.S. dollar would motivate me to want to extract value from these contracts before domestic and global economic factors adversely impacted price. Though, I can see how an investor might consider holding or buying until there were stronger indicators signaling the likelihood of a price increase or decline.
Natural gas scenarios:
1. Weather- US forecasts for September call for high temperatures across the “southern tier” states with seasonal temperatures to the North and in the Northeast.
Bearish, the north and northeastern states are not experiencing changes in seasonal temperatures so the demand in that region is unmoved and higher temperatures in southern tier states would decrease demand for natural gas when heating needs are low.
2. Economy- The DOW Jones Index rose +100 points today. Unemployment increased, but the Consumer Price Index fell due to lower energy prices.
Bearish, weakness in the US economy and price declines across the energy sector will affect natural gas pricing.
3. Changes in inventory- The Energy Information Agency’s Weekly Natural Gas Storage Report showed an increase of +65 billion cubic feet. While this was less than forecasted, total gas in the ground still exceeds last year’s levels by +32%.
Bearish, despite being down from projection supplies of natural gas still increased and unextracted reserves exceed prior year by a significant margin.
4. Power Generation- Eight of the nation’s nuclear power plants are offline for maintenance and refueling ahead of the winter peak load, while coal plants continue to burn cheaper natural gas.
Bullish, with nuclear plants offline and coal plants burning affordable natural gas one could expect prices to rise as demand increases.
In my overall view, the market is bearish on these factors and I would buy natural gas contracts to capitalize on low prices because there are good indicators that prices will rise again when there is demand on the reserve gas. Despite the warmer weather, down CPI, and a strong inventory, these all seem like temporary conditions that will yield a better return on investment than choosing to sell at this time.
