31st
2011 World Energy and Economic Outlook – Muddled Futurology
As the year ends on a high note for equities and energy commodities (US indices rose roughly 10% on the year, EU indices up 9%, crude and Brent up $10 year, RBOB Gasoline up $0.50…), energy authorities (EIA, IEA and OPEC) and market analysts are having a go at the outlook for energy prices, supply and demand for 2011.
The price and demand of energy will largely be determined by the state of the global economic recovery, and in particular, the propensity of the Eurozone to simply survive an attack on the legitimacy of a monetary union sans political (fiscal) integration.
There are arguments on the bearish and bullish side of the fence that shed light on where we could be a year from now. Ultimately however, there are a few “Black Swans” such as the collapse of the Eurozone, a war with Iran, or a total meltdown in high frequency trading platforms, that could collapse or spike energy price.
Crude will go to 100 bucks a pop – here’s why
Analysts at JP Morgan and BOA have bullish outlooks for 2011, based namely on a sustained recovery and a weakening US Dollar following The Fed’s announced fiscal incontinence through the coming quarters (QE2, QE3…). Stockpiles in crude oil are further expected to drop further through 2011 thanks in part to the underlying rising demand from emerging economies. Geopolitical tensions in Iran and North Korea along with financial speculation add further clout to a bullish however volatile upcoming year. Top that off with OPEC’s clear intentions to have a “fair” price in the $90 range (Saudi oil minister Ali Al-Naimi famously let that one slip in early December) and you have some solid arguments for a bullish year in crude oil. Safe to say OPEC would like crude in the $90 range and will use its power to shut off supply valves as best as it can. One should remember however that non-OPEC countries produce more oil daily than OPEC.
Naturally, creeping rising oil prices will ultimately have effects on consumers at the pump (money given to Chevron is money taken away from tangible consumption…) and possibly create a feedback loop of price resistances around a sustained $100/barrel price if energy prices start to pull back on an economic recovery.
Crude is overbought, 75 bucks a barrel is a price based on fundamental indicators
One of the driving factors for a bullish end to the year in crude has been the perception that a) The Fed’s $600 bn purchase of Treasury securities will inevitably debase the dollar and thus drive up crude prices, and that b) Economic indicators in the US (job claims, construction, Purchasing Managers’ Indexes) are putting the US on the road to recovery.
As concerns the dollar, it has performed well in the forex market since QE2 was announced, and has constituted the lesser evil of currencies in light of the Euro’s debt debacle (gold, a fiat currency just not in reach of policymakers, is the true hedge from the forex market). Furthermore and perhaps more importantly, despite the injection of over half a trillion dollars into the US banking system and a substantial rise in monetary growth, the adjusted monetary base in the US has in fact not budged, meaning that fresh cash in the US banking system is not making it out of vaults and reserve account and thus not into the broader economy. As such, an stable US dollar on the forex market is conceivable resulting in crude prices dampened by deflationary trends.
With regards to the recovery in the US, a reversal hinges on several possible events, namely an attack on the Eurozone, which if it breaks up, could cause a loss of up to 10% of GDP in the EU. The EU’s very real, and very serious sovereign debt default risks worsened by the marauding bond market could see the 2011 road to recovery take a long detour through the “Euro collapse” scenic route. On this point, even the haphazardly created European Financial Stability Facility (a half baked attempt to have Germany, France and the US via IMF guarantee Eurodebt) will not stop a serious attack on Spanish debt levels, not to mention Italian or Belgian ones – countries whose debt/GDP ratio are either at 100% or approaching…
“Prediction is very difficult, especially if it’s about the future”
It is hard to foresee how the Fed’s intervention in the economy will unravel. Harder yet will be the Eurozone’s stress test in 2011, which will inevitably see bond markets test the debt levels of countries belonging to an integrated currency area, yet lacking the fiscal redistribution capacity to address debt, deficit and growth imbalances across the area (more on this, read Krugman’s Lessons from Massachusetts). All bets are on for 2011, we could see equity prices go through the roof at the risk of creating an asset bubble, gold hit $2,000/oz, and crude hit a plateau of $100. The arguments are certainly there to support that scenario. Yet also likely, is a sharp reversal in energy prices based on stronger dollar prices, low demand across the OECD, and catastrophic debt defaults in Europe.
