Heading into 2010 there seems to be one constant in the energy markets—be it international, domestic, or local—and that is supplies should not be the issue in the New Year. This means that while demand will ebb and flow as it is want to do over the course of the calendar, barring an unforeseen change, ample supplies could keep a lid on buying enthusiasm throughout 2010.
All eyes will be on the crude oil market going forward after it spent the early winter trading above what many believed to be its true value. This idea comes from a large-scale look at futures spreads to gauge the underlying fundamentals of the overall market. And, the latter part of 2009 showed that the global supply and demand situation was indeed bearish as nearby futures spreads consistently traded at greater than $1 contango, moving to greater than $2 in December. In fact, the near $2.50 contango in mid-December was the weakest the fundamentals of the market had been since February 2009 when the spot-month contract was trading between $35 and $45 as opposed to the December range of roughly $69 to $79.
Therefore, given the bearish supply and demand situation indicated by the futures spreads and confirmed in the weekly EIA stocks reports that show national stocks on hand running about 107% over the five-year average, the first quarter of 2010 could see the spot-month crude oil contract sag back to between $65 and $55, with an outside shot at dropping as far as $48. It is at that point in the calendar year though that seasonal demand, generally tied to early-season gasoline demand, begins to increase and support prices.
The question of seasonality could be a problem for crude oil though. The market tends to post its seasonal high in early July before moving through a late summer, fall and winter downturn. However, in 2009 the high didn’t occur until mid-October due to the extraordinary correlation between commodities in general and the Dow Jones Industrial Average, with additional support tied to the weak U.S. dollar index. The question facing the market going forward is if the later than normal high will lead to a later than normal low, so instead of a bullish turn occurring in late January it possibly may not be seen until the end of the first quarter of 2010.
Much of this will have to do with gasoline demand that has been in decline since 2007. Normal seasonal buying in RBOB gasoline futures tends to begin in late-January to early February and last through the Fourth of July holiday (roughly), creating a rally in the spot-month futures contract of about 37%. Like crude oil, however, late December domestic gasoline stocks on hand were running 106% over the five-year average possibly dousing early season buying enthusiasm in 2010.
As with the crude oil market, a look at the structure of the RBOB gasoline futures (trend, spreads) indicates the market could see a later than normal seasonal low established. In late December, the spot-month futures contract was just beginning to move into a downtrend with longer-term price support pegged between $1.6750 and $1.45, with an outside chance of an extended selloff to near $1.2250 due to longer-term bearish underlying fundamentals.
Once again the latter is indicated by the strengthening contango in the nearby futures spreads, moving to almost three cents at the end of 2009. If this pattern were to continue, and given the weekly reports showing stock builds over the five-year average it should, then the futures market could certainly slide back to the lower target areas, pulling national average fuel prices with it.
Of course, there should remain a multitude of market factors outside of supply and demand that could continue to influence both crude oil and gasoline in 2010, most notably the Dow Jones Industrial Average and the U.S. dollar. But even taking those into account, both of these energy markets look like they should come under increased pressure in early 2010 before staging a more subdued seasonal rally in the spring and summer.
About the Author
As senior analyst for Telvent DTN, Darin Newsom provides DTN customers with market insight and oversees all Telvent DTN market commentary. Newsom has more than 20 years of experience analyzing commodity markets and developing risk-management strategies.