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Crude Oil & Commodity Prices – Consolidation or Trend?

May 19th, 2011

OMAHA (Capstone Energy Services) – Crude oil and other traded commodities have seen significant price declines in the first two weeks of May. The commodity market retreat was lead by a collapse in silver prices which dropped from the $50 per ounce peak on April 25th. Crude oil, both NYMEX and Brent slid about 13%, while broad based commodity indexes lost about 8%. Gasoline and heating oil followed in lockstep with crude also declining nearly 13%. Natural gas, however, continued to reflect its independence from other commodity markets during the same period posting the highest daily price since last January and then declining back to the April trading range.

It appears that some commodity investors were becoming nervous with the high prices that evolved over the last six months, due to inflationary indications and signs that the economy has been slowing as the year progresses. It was reported this week, that manufacturing production declined in April, the first decline in 9 months. Even with these signs of economic weakness, it is unclear if this price drop is a temporary profit taking decline or a longer term directional shift. Goldman Sachs, who predicted the sharp drop in crude oil and commodity prices, now predicts another strong upward price move. Similarly, J.P. Morgan Chase this week predicted a rebound in Crude oil, gold and commodities, citing concerns over supplies later in the year.

Predictions by these large investment houses carry a lot of weight particularly for hedge funds and other large non-commercial investors looking to maximize returns. Nevertheless, there are signs that a retrenchment by consumers over higher prices, including food and energy, is occurring. It is not yet clear what longer term effect the rapid increase in commodity prices over the last six months will have on the economy. A move back up to the high April price levels could very well create even more consumer concerns and further impede the domestic recovery. These competing factors have created volatility in commodity markets but no clear directional consensus.

Over the next few weeks, economic indicators both domestically and internationally will be important in determining if prices will continue to fall or head back higher. A key factor to watch will be the value of the U.S. Dollar relative to other currencies, which has been strengthening lately on financial difficulties in Europe and continued inflationary pressures in emerging economies. If confidence in the Dollar further declines due to a faltering U.S. economy or a perceived failure to address debt and deficit concerns, then investors may once again begin heading for the safety of precious metals and commodities. At this point, it is difficult to tell which way these prices will go.

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By Ed Freeman

Glossary Terms

Glossary Terms

Nominated Volume

The physical quantity of gas requested, typically in MMBtu/day, for a specific contract or for all contracts at a specific point.

Marketing Affiliate

A marketing company that has corporate ties to an interstate pipeline, an intrastate pipeline, or a local distribution company.

Energy Only Providers

Power marketers or other electricity vendors who provide and bill for only the energy component of the electricity consumed by the end-use customer.

Therm

A unit of heating value equivalent to 100,000 British thermal units (Btu).

Real Power

The component of electric power that performs work, typically measured in kilowatts (kW) or megawatts (MW)--sometimes referred to as Active Power.

Injection (Storage)

The process of delivering natural gas into a storage field for future delivery and use.

Price Ceiling

Statutory maximum lawful prices for various categories of natural gas, including gas destined for both the intrastate and interstate markets.

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Energy Delivery Chains

Energy Delivery Chains

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Energy & the Environment

Energy & the Environment

How we assist clients in responding to national environmental concerns.

  • Initiate and manage a "Green" energy procurement program
  • Evaluate national legislative and regulatory initiatives
  • Research state and local energy efficiency programs and incentives
  • Track energy use and related emissions estimate