The Energy Information Agency came out with their latest Short Term Energy Outlook and I was glad to see that they are using the futures markets to improve their market forecasts. While the EIA has done a phenomenal job in the past providing the industry and traders with valuable information, it seemed that their price projections were always a bit behind the curve. More often than not, especially during the days of the strong bull petroleum market, it seemed that the Energy Information Agency was always playing a bit of catch up.
Of course it wasn't always their fault. You see there was an era of denial about the reasons for the bull market and if the EIA dared come out about the odds for sharply higher prices, they might have been accused of feeding into the bullish frenzy. The EIA really had to be careful about stepping out about a bullish price projection even if deep within the walls of the Department of Energy they felt that higher price were a possibility. That restraint sometimes led to conservative calls that were meant not to rattle a market that was already looking for an excuse, any excuse, to reflect the reality of increasingly bullish fundamentals.
Yet yesterday I noticed that the EIA is embracing the predictive powers of the futures markets as well as the future options to give the world a more accurate forecast so producers, users and traders can more confidently prepare for their future needs. Take their outlook for oil for example. According to EIA the price for West Texas Intermediate (WTI) crude oil should average about $100 per barrel in 2012 ,which is almost $6 per barrel higher than the average price last year. But more importantly they point out that based on recent futures and options data, the market believes there is about a one-in-fifteen chance that the average WTI price in June, 2012 will exceed $125 per barrel.
This addendum is of extreme value for hedgers and traders. Instead of locking in on the EIA average price of $100 a barrel, they point out the odds are one-in-15 of being substantially higher. It is this kind of information that business could use to perhaps stay in business or actually show a profit instead of a loss and let's face it you have the futures speculator to thank for it. You are welcome!
While we may not always like what the futures markets are telling us, you have to admit the markets are right more often than they are wrong. In fact I would take it a step further by saying that the markets are always right at least in assessing the loss based on the most current information available. Take gasoline for example. I know we don't want to hear that there is about a one-in-four chance that the U.S. average pump price of regular gasoline could exceed $4 in June of this year but deep down inside many believe that the odds of that happening are higher. But the facts are, there is 3 in four chance that it will not happen.
The EIA says that they expect that regular-grade motor gasoline retail prices will average $3.55 per gallon in 2012 which compares to $3.53 cents per gallon last year, and then average $3.59 per gallon in 2013. They say that during the April through September peak driving season each year, prices are forecast to average about 7 cents per gallon higher than the annual average. Yet by knowing that the odds are greater that gas will not hit $4.00 a gallon, then business can better protect themselves from the risks.
You see because of early refining maintenance and a geo-politically pumped up oil price, we may be hitting our gas price peak early. Especially when you consider the demand side of the equation. According to the MasterCard Advisors' SpendingPulse survey gasoline demand in the United States fell another 2.8% to 8.269 million bpd during the week-ended Feb. 3, marking what they say is a 5.3% decline versus the compared to the same period a year ago! And that is when we had a lot of snow on the ground. MasterCard said that if you consider the four-week moving average demand figure, it posted its 46th consecutive year-over-year decline, down 4.9% compared to the similar period last year. The week prior, the four-week average was 4.6% lower than last year.
You can see know why you should not bet the farm on the inevitability of $4.00 gas because of demand weakness and the possibility that crude could fall back if the world settles down just a bit.
Of course the market short term will be more focused of the hopes of a deal on Greece and a surprise drawdown in crude and gas supply! Maybe that shipping channel had a bigger impact than I thought.
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There is a substantial risk of loss in trading futures and options.Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. PFGBEST, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.