Energy & Commodities
Energy analyst discusses the outlook for natural gas and oil.
Phil Flynn is senior energy analyst and a futures account executive at Chicago-based The Price Futures Group. He is one of the world’s leading energy market analysts and a daily contributor to Fox Business Network, where he provides market updates and analysis. HAI managing editor Sumit Roy recently caught up with Flynn to discuss the latest developments in the energy markets.
HardAssetsInvestor: Natural gas has been rallying recently, and now it’s at a seven-month high. Is it solely cold weather that’s driving up prices?
Phil Flynn: A lot of it obviously is the cold temperatures. It’s been cold, and based on the weather forecasts we’re seeing, it’s not going to get a heck of a lot warmer. In the next two weeks, we should see some substantial drawdowns in inventory. Having said that, yes, it is definitely the cold weather that’s given us this dynamic move, but you don’t want to underestimate the nonheat-related demand. There is demand growing everywhere.
While the cold weather seems to be overshadowing that right now, it’s definitely a story that’s going to continue. Manufacturing businesses are going to take advantage of these low natural gas prices and you’re going to see the nonheat-related demand continue to grow.
It’s going to continue to astound people. Our exports are a lot stronger; we’re going to be seeing a lot of natural gas going to Mexico, and they’re approving additional exports a lot more quickly than anybody thought possible.
Weather’s definitely your headline, and we probably wouldn’t be moving up like this if it weren’t cold, but there’s definitely more to it than just the weather.
HAI: Do you think it’s too late for investors to get in for this winter run?
Flynn: I don’t think so. Obviously, we could see some pullbacks along the way. But to me, there could be significant upside left in this market. The only concern we have at the moment is that the market is a bit overbought and it might try to shake some people out. But having said that, we broke out of a major channel to the upside.
We really do seem to be gaining some momentum. While we might be able to pull back to $4, it’s interesting that before, a lot of people thought that $4 would be a ceiling. Now it looks like it could be the floor, long term. I could foresee a scenario, if some of these colder, long-term forecasts come to fruition, that we could very easily test $4.50. And we might even surprise some people and move a bit higher.
It’s awfully early to be having these cold temperatures. And we’ve been lulled to sleep in the past, because the last couple of years, we’ve had some warmer-than-average winters and cooler-than-average summers. We really haven’t tested this market on full cylinders.
The way the weather is right now, how early it is in the season, we may really test the limit of the demand side, and it may surprise some people on the upside; mainly because, as I said, we are seeing a lot of nonheat-related demand as well. You may see more surprises on the upside than the downside.
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“No one need think that the world can be ruled without blood. The civil sword shall and must be red and bloody’.
Martin Luther
The Federal Reserve is up to bat again today. And it seems the bets on tapering are rising with each passing moment.
Let’s just say I’d be surprised if they announce tapering today. I have several reasons why, but let’s just say the worrisome state of things in Italy is on the Fed’s radar screen …
Greyerz: “Eric, there will be no tapering. It’s impossible. They can’t taper because the situation in the US is still very desperate. Today, for example, we had the news from Zions Bankcorp, which is in Utah, that if they have to follow the Volcker Rule and value their debt at market value, not at maturity value, the bank will have serious balance sheet problems.
This is what I’ve been saying all along, if banks had to value their toxic debt at market value, the banking system would not survive. The Fed and the rest of the central banks know this. That means they will absolutely not stop tapering because the banking system would not stand. It would not survive either in the US or in Europe. This is why the Fed decision will definitely be no tapering.
The troubling point here is the central planners will want to push gold down to the US dollar lows because gold in all of the other currencies has already made lower lows than what we saw in late June. I’m not sure they will succeed in pushing gold to new lows, but it is irrelevant because whether the rally starts at Christmas or the beginning of 2014, next year will be the most spectacular market for gold and silver because of what’s going to happen in the world economy.
As we see the fall in the world economy in 2014, that will lead to massive money printing and QE from all of the central banks next year. Gold and silver will be the major beneficiaries of this money printing and QE. So 2014 will be a huge year for both the metals and the mining shares.”
IMPORTANT – KWN has more interviews:
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This insane focus of the Fed’s options — “tapering” or not, misses the entire point. Most people admit that the whole quantitative easing has failed. True, the unemployment rate has fallen from a peak of 10% in 2010 to 7% today and the Fed’s target it claims is to keep short-term rates a near zero until that falls to 6.5%. But there are many who believe tapering is required as quickly as possible, because they argue it is contributing to an overinflated stock market.
The intense debate over the virtues of quantitative easing is really meaningless. It has failed to accomplish any goals because the Fed does not take direct action. It offset the quantitative easing by creating an excess reserve facility paying 0.25%. Banks have over $2 trillion deposited there risk free. So while the Fed “bought” bonds to lower long-term rates, it then replaced that avenue with a boulevard allowing banks to sell their junk bonds to the Fed and then park the cash on which they then paid them interest. The idea this would “stimulate” the economy has proven to be false because the banks failed to lend the money out.
Lower the interest rate the Fed pays banks is the ONLY real stimulus. If the Fed eliminated the interest rate it pays banks of 0.25%, then you would see stimulation. Everything the Fed has done to this day has failed to produce inflation and the stock market rise is simply capital trying to earn a living. This is still no speculative bubble.
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(Reuters) – U.S. nonfarm productivity rose the most in nearly four years in the third quarter but a drop in unit labor costs underlined a lack of inflation pressure, bolstering arguments for the U.S. Federal Reserve to maintain its massive monetary stimulus.
Productivity rose at a 3.0 percent annual rate after increasing at a 1.8 percent pace in the second quarter, the Labor Department said on Monday, driven by a 4.7 percent rise in output.
The data revised up an earlier estimate and was slightly above the 2.8 percent increase analysts forecast in a Reuters poll. It was the largest rise since the fourth quarter of 2009.
Productivity, which measures hourly output per worker, was 0.3 percent higher compared to the same period last year.
Unit labor costs – a gauge of the labor-related cost for any given unit of output – fell at a 1.4 percent rate in the third quarter, roughly double the originally estimated fall, underscoring the lack of wage-related inflation pressures in the economy. Unit labor costs had risen at a 2.0 percent pace in the second quarter.
The Federal Reserve is likely to consider subdued inflation when it meets this week. Over the last year, inflation has been well below the U.S. central bank’s 2 percent target, which has led some analysts to expect it will be slow about winding down its bond-buying program.
Economists polled by Reuters had expected unit labor costs to fall at a 1.3 percent pace in the July-September quarter. Labor costs were up 2.1 percent from a year ago.
…more:
Dollar gains ground before Fed decision; yen struggles
LONDON – The dollar gained against the yen and euro on Wednesday, helped by a rise in U.S. yields, as investors positioned for a Federal Reserve decision later in the day on whether it will start to reduce its monetary stimulus this month.
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