From the December 2013 issue of Futures Magazine • Subscribe!

2014 Hot Markets: Stuck on taper

Natural gas in demand 

One of the more positive stories of 2013 was the speed at which U.S. energy production grew, which could make energies one of the more interesting sectors to watch in 2014. 

“We are in a new era of lower energy prices,” declares Phil Flynn, senior energy analyst at The Price Futures Group. “What is happening in the United States in terms of production is historic. It is game changing and it is changing the energy universe as we know it.”

 The shale gas and oil production in the United States is putting downward pressure on prices, which only may have been scratched in 2013 because of concerns over Middle East production. 

“It has been a choppy ride because of Hurricane Sandy and other [geopolitical] issues. But [with] the increase in oil production and the increase in capacity from many of our refiners, we are going to see prices go down,” Flynn says. He notes that there is even the chance of cooperation with Iran. “If they decide to play ball and allow inspectors in, they may come back [into] the global energy market.”

Near term, he expects crude oil to test $88 a barrel, and if there is a mild winter, he believes it can test or even fall below $80. 

Lazzara also believes crude will test $80. “This sell off is just getting started,” Lazzara says. “There are a lot of players producing energy. Iraq’s production is getting stronger.”

Perhaps more interesting is the natural gas market. 

“Natural gas is almost like two different markets — the long-term market and the short-term market,” Flynn says. “The short-term market obviously is going to be dependent on weather. Right now natural gas is under pressure. The long-term picture for nat gas — 5-10 years — we are near a historic low.”

Flynn says just as high prices cure high prices, low prices cure low prices; as the shale revolution has brought down gas prices and eventually will bring down crude oil prices, low prices are creating increased demand — particularly internationally — for natural gas. There also has been a move by big transportation firms to move, ala T. Boone Pickens, to natural gas for fuel.

“Fed Ex is changing all its short-duty trucks to natural gas. Warren Buffet is looking into running Burlington Northern [freight] on natural gas,” Flynn says, noting the railroad is the biggest consumer of diesel fuel after the U.S. Navy.

Meanwhile, Europe wants an alternative to its main natural gas supplier, Russia, which likes to bully its neighbors. And Japan has increased energy needs with reductions in its nuclear energy output. “Russia is threatening the Ukraine, Japan is begging us to step it up,” Flynn says. “Japan and Europe want us to export natural gas. Natural gas last winter was going for as much as $20 in China.” 

Becoming a natural gas exporter will require the United States to ramp up liquefied natural gas (LNG) facilities, but with price differentials where they are, it should happen quickly. “We were paying $3 or $4 over here. With that kind of discrepancy market forces won’t let that continue forever,” Flynn says. “If you ever get below $3 again, it is going to be a major long-term buy. Shorter term, it looks like $3.35. Over the next two years the demand for natural gas is going to explode, similar to oil prices in the late 1990s. What happened is the demand for that cheap product exploded and then before you knew it we had a major bull market.”

An interesting natural play may be its long-term price curve. “The curve is relatively flat,which to me is amazing,” Flynn says. “If I were a big corporation and I could lock in September 2020 natural gas, I would be jumping all over it (see “Hitting the curve,” below).”

The June 2017 natural gas contract at the beginning of November was at $3.90, the May 2020 contract was at $4.50. Natural gas always has been a domestic market, but with the huge price discrepancies overseas that demand should push prices higher out on the curve when transportation is worked out (see “Dan Dicker: Mad about oil,” October 2013).  “If I were a natural-gas-dependent corporation, I would be locking in these prices for a long time,” Flynn says. 

He adds that the increased domestic energy production should be positive for the dollar. “It changes the dollar flows. Instead of dollars running out to other countries for importing oil, more of those dollars are going to stay home. The more dollars you have at home, probably the faster you are to remove stimulus; it should eventually make the dollar stronger,” Flynn says. 

Keeping an eye on beans

While commodities may be set to benefit from a general increase in demand, soybeans may be the most interesting grain market to watch. Chad Burlet, principal of commodity trading advisor Third Street Ag, says, “We can expect quite a bit of volatility in the soybean market in the next six months. The current situation is very tight and prices are high,” Burlet says. This has led to record planting in South America, which could lead to a 15-million-ton premium to last year’s record South American crop,  according to Burlet. “With good weather the market could break $2-$3 per bushel.  However, if the crop gets hurt we easily could rally by that much,” he adds. 

If all this analysis is making you hungry you may not want to hear that you probably will be paying more for a steak in 2014. 

 Alvin Hults, principal of introducing broker Tejas Trading Company, expects live cattle to hit all-time highs in the first half of 2014. 

“Supply is tight due to the massive kills,” Hults says. 

Two years of droughts and elevated feed prices have caused feedlot operators to kill livestock prematurely, leading to a short supply of beef. While the worst drought was in the 2011 growing season, 2012 had drought condition as well and supplies of grain had been tight already. 

“We didn’t have any recovery in 2012. We slaughtered cattle that [weren’t at full weight] due to high grain prices,” Hults says, adding that live cattle could get as high as $1.50.

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