2010: bullish or bearish for energy markets?

By Benedict De Meulemeester

By Benedict De Meulemeester on 18/01/2010

Energy markets have a terrible habit of rising during the New Year's period. On the 6th of January of the new year, the oil price ended the day at 81,89 dollar per barrel, well above the 80 dollar barrier that had been a rooftop on the market for the last four months of 2009. In the week before Christmas, the oil prices traded as low as 72,99 dollar per barrel, meaning that we saw a more than 12% price rise during the Holiday period. It looks like some people in the oil market left the table early this year for their trading desk. And it looks like they were in a bullish mood. Such surprise movements at a time when most people are on holiday always feel nasty. It's like the market is not giving you a chance to do something. Fortunately, the bullishness in the oil market didn't spill over into the other energy markets. And even more fortunately, the bull party was quickly over. At the moment of writing these words, the oil price is back below 80 dollars at 77,22.

What inspired these New Year bulls? I personally believe that it was a clear case of 'turning the page' optimism. 2009 was a year of deep economic gloom. But as the end of the year came near, the picture started to look rosier. In their end-of-the year reports, most economists agreed that in 2010 the economy would do better than in 2009. Dubai and Greece were scary, but so far, these issues seem to be brought under control. This 'things can only go better' attitude spilled over into the oil market and caused prices to rise. Apparently, this wasn't supported by fundamentals. The call for extra oil in the physical market wasn't strong enough to justify oil prices over 80 dollar.

The market of the first weeks of 2010 therefore looks unclear: a rapid bullish start with an equally rapid bearish correction. How will this continue?

For oil markets, the past year has learned us that they are inclined to rise rapidly with the economic outlook. Oil is commodity that is traded worldwide. The improving economy was mostly supported by developments in China, which is doing remarkably well in terms of economic recovery. China consumed record levels of oil in 2009 and this was the main support for higher oil prices. Moreover, the easy-to-produce oilfields have recently been replaced by much more difficult and expensive sources such as tar sands, deep-sea off-shore production or bio-fuels. This causes rapid price rises at even very small increments in oil demand.

For natural gas markets, the outlook is different. Natural gas consumption is much more focused in Northern America and Europe. And these are the regions where the economic recovery and gas demand growth are slow. This has caused an important gap between oil prices and gas prices. Lower gas prices were also supported by reports of expanding gas reserves in the US based on improved recovery techniques for shale gas.

With this jump up and down of oil prices, it looks like 2010 will be another interesting year in the energy markets. The big question on my whiteboard is: will the decoupling of oil and natural gas persist? I'll keep you informed.


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