The end of a trend

By Benedict De Meulemeester

By Benedict De Meulemeester on 2/06/2009

As oil prices are approaching 70 dollar, it becomes more and more difficult to maintain that energy markets are still in a bear trend. Short term technical charts show a firm bull trend, but what is the broader picture? We are having animated discussions among ourselves here at the E&C office as to what could be the reasons for the current uptrend. Is it just speculation and will we see the downward correction that the International Energy Agency has predicted? Or is something else, something more fundamental going on? Could it be that worldwide energy demand is growing again and that this is the cause of optimism in energy pricing? Has the bearish trend, not only of the oil prices but also of the economy in general ended?

Recent market evolutions have learned us a few lessons:

1. Don't speculate that it is all just speculation. We have seen in the past years that speculators can indeed push prices. For me, however, it has not been proven that they can push it in a direction that is not supported by fundamentals. When the oil price was rising, demand for oil was higher than supply. Speculators picked up this signal and accelerated the pace at which the price was rising. When the oil price started to fall, this was due to demand erosion. Again, the sell-off by speculators accelerated the market movement. But if today's price would be rising without any change in the supply - demand dynamics, this would be an uprecedented case of speculators moving the market.

2. We will only know about these supply - demand dynamics in a few months. This brings us to another lesson. Information on fundamentals is too slow to be a reliable energy market indicator. If prices are rising, it is because of what market participants feel now when they are in the market. It is because people keep on buying even at higher prices because they really need the product. It takes a few months before we get reliable data on such real world demand rises. The data collection process is simply too complicated. Therefore, anyone that relies on fundamental analysis, is still focused on demand erosion today and believes the uptrend to be exaggerated. Even the International Energy Agency is claiming this. With prices continuing to rise day after day, this is an increasingly uncomfortable position.

3. The end of a trend is not frontpage news. This makes it so difficult to recognise trend reversals. The moment that all analysts agree that a trend is over and the newspapers start reporting on it, is mostly when prices have already risen (or fallen) substantially again. For industry, grasping that currently the downward trend could be over, is further complicated by the fact that many companies are still going through the deepest point of their own economical crisis.

4. The price is always right. It could very well be that in a few weeks or months time, we will indeed see that the current bull run was false or exaggerated. But today it is there and it tells us a clear story: the risk of derailing energy budgets is higher again than a few weeks ago. And at that moment, the price message was also clear: it was a deep dip and a very good moment to do price fixing. And day after day, it becomes more clear that it was.


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