Phil Flynn is senior energy analyst and a futures account executive at Chicago-based The Price Futures Group. He is one of the world's leading energy market analysts and a daily contributor to Fox Business Network, where he provides market updates and analysis. HAI managing editor Sumit Roy recently caught up with Flynn to discuss the latest developments in the energy markets.
HardAssetsInvestor: Natural gas has been rallying recently, and now it's at a seven-month high. Is it solely cold weather that's driving up prices?
Phil Flynn: A lot of it obviously is the cold temperatures. It’s been cold, and based on the weather forecasts we're seeing, it's not going to get a heck of a lot warmer. In the next two weeks, we should see some substantial drawdowns in inventory. Having said that, yes, it is definitely the cold weather that's given us this dynamic move, but you don't want to underestimate the non-heat-related demand. There is demand growing everywhere.
While the cold weather seems to be overshadowing that right now, it's definitely a story that's going to continue. Manufacturing businesses are going to take advantage of these low natural gas prices and you're going to see the non-heat-related demand continue to grow.
It's going to continue to astound people. Our exports are a lot stronger; we're going to be seeing a lot of natural gas going to Mexico, and they're approving additional exports a lot more quickly than anybody thought possible.
Weather's definitely your headline, and we probably wouldn't be moving up like this if it weren't cold, but there’s definitely more to it than just the weather.
HAI: Do you think it's too late for investors to get in for this winter run?
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Flynn: I don't think so. Obviously, we could see some pullbacks along the way. But to me, there could be significant upside left in this market. The only concern we have at the moment is that the market is a bit overbought and it might try to shake some people out. But having said that, we broke out of a major channel to the upside.
We really do seem to be gaining some momentum. While we might be able to pull back to $4, it’s interesting that before, a lot of people thought that $4 would be a ceiling. Now it looks like it could be the floor, long term. I could foresee a scenario, if some of these colder, long-term forecasts come to fruition, that we could very easily test $4.50. And we might even surprise some people and move a bit higher.
It's awfully early to be having these cold temperatures. And we've been lulled to sleep in the past, because the last couple of years, we've had some warmer-than-average winters and cooler-than-average summers. We really haven't tested this market on full cylinders.
The way the weather is right now, how early it is in the season, we may really test the limit of the demand side, and it may surprise some people on the upside; mainly because, as I said, we are seeing a lot of non-heat-related demand as well. You may see more surprises on the upside than the downside.
HAI: How about longer term? I know you’ve recommended long-dated natural gas call options in the past. Is that something you're still interested in?
Flynn: It is. We've been saying that we expect that, by 2015, natural gas will get to about $7. And I know it sounds kind of crazy, it even sounds kind of expensive, but in the whole scheme of things, $7 natural gas isn't really that expensive if you consider what they're paying for LNG in Europe and other places. I bet they'd love to lock in some $7 gas.
You're going to see kind of a reversion to the rest of the market. As exports start to increase and demand starts to go up, we're going to probably move the market a little higher. And that's not necessarily a bad thing. What we're going to see with that is a big increase in economic growth.
Eventually we're not just going to keep natural gas glutting in one area; at some point, we're going to start moving it because it's too valuable of a commodity. Low prices are going to cure low prices. You're going to find a way to export it, you're going to find a way to use it, because it's too cheap not to.
One comparison I would make is when oil prices went to $10 or $11 in 1999, and everybody thought it was going to go to $7 because there was a glut of oil. But what happened is that when prices got that low, low prices cured low prices, and then you had all this exceptional demand growth in the emerging markets like China and India. A lot of that was driven by economic reform, but also by cheap prices.
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In my eyes, you’re seeing this commodity boom-and-bust cycle with natural gas. It went from all-time highs to close to all-time lows (when you adjust for inflation). Now you should get a reversion to a normal price. If $15 was the high end and below $2 seems to be the support, somewhere in the middle—around $7—would be a reasonable cost and still put the U.S. at an advantage with other places in the world where prices are higher.
HAI: What about oil? Are you a bull or a bear in 2014?
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Flynn: I'm a bear on oil short term. When oil was above $100, I was writing some commentary that I thought oil was going to test the lower end of the trading range at $88. We were at $102-103, and I said if we break $100, we've crossed the Rubicon, the point of no return, and oil prices should collapse. And I thought we'd see a quick test of $88. Well, we didn't get to $88; we shot down and we got to $91 and some change. And now we're bouncing back up toward $97-98.
We definitely saw an uptick in demand in the United States because the refiners are kicking it into high gear. We're starting to get oil out of Cushing, Okla. And as the Southern leg of the Keystone pipeline starts to suck oil out of that area, we're going to push it back down. And because of more reliable supply coming out of the North Sea and the possibility of increased Iranian exports, we saw spread come in.
We saw WTI come up a lot in a short period of time, and we've seen the Brent crude come down quite a bit in a short period of time. What we're seeing is not so much an oil rally here in the United States, because the production of oil in the U.S. is at a 25-year high. Rather, you're seeing an end-of-the-year adjustment on the Brent-WTI spread.
In 2014, is Brent going to gain on WTI? Or is WTI going to gain on Brent? Well, to be honest with you, I don't care. I think next year both are going to fall. Instead of spreading between $120 and $90, we'll probably be spreading between $80 and $90, or something more reasonable on both sides. We're going to see production rise across the board.
Long term, WTI at some point will reassert itself as a global benchmark, mainly because the United States is going to be one of the biggest oil producers, one of the biggest importers, one of the biggest exporters. Everything that's going to be happening with oil is going to be happening in the United States. And I think it's going to be a good barometer of global economic growth.
By. Sumit Roy
