Musings: Is Capital Discipline Re-emerging in The Natural Gas Market?

The European financial turmoil is roiling global debt, equity and currency markets. These markets in turn are impacting commodity markets and creating significant near term volatility. There doesn't appear to be much direction evident in commodity markets other than their reaction to global events. Weekly changes in crude oil inventories and natural gas injection volumes keep prices bouncing around.

West Texas Intermediate crude oil seems to be bouncing between $80 and $90 per barrel, although a leading oil trader says the price action has established a pattern of lower highs and lower lows leading him to sell crude oil futures every time they rise and buy them when they fall until that trade doesn't work.

The picture for natural gas prices appears less clear. A larger than expected injection of natural gas into storage was reported the week before last while a smaller than anticipated injection last week has kept prices unsettled. Natural gas in storage remains below year ago levels and about in the middle of the five year range. The weekly volatility reflects changes in weather and perceptions of industrial demand trends.

Increased concerns about future economic growth, as highlighted by the International Monetary Fund's reduced forecasts for U.S. and global economic growth in 2011 and 2012. These reduced economic growth estimates suggest the key to any recovery in natural gas prices in the near term will depend on falling supply growth rather than a demand increase......Read the entire Musings article.

High Oil Prices Have Fund Managers Moving Into "Risk Off" Mode

Let's ask ourselves "what is the true cost of oil". Economists are furiously downsizing their economic growth forecasts for 2011 in the wake of the oil price spike, both for the US and for the world at large. Since last week, West Texas crude prices have soared $12 from $86 to $98. Each $1 increase in the price of oil jumps gasoline prices by 2.5 cents. Each one cent rise in the cost of gasoline takes $1 billion out of the pockets of consumers.

If oil stays at this price, it removes $30 billion from the pockets of consumers. At $110 a barrel, it short changes them by $60 billion, or 4.1% of GDP. Subtract this out from even the most optimistic GDP forecasts for this year, and you end up with negative numbers. That, my friends, is what they call a recession. If you wonder why hedge fund managers have lurched into an aggressive "RISK OFF" mode, are throwing their babies out with the bathwater, and why the volatility index is spiking to three month highs, this is why.

Posted courtesy of our partner John Thomas, "The Mad Hedge Fund Trader"


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