This will be my last article of 2016 as I am taking a couple of weeks off to return to England and spend Christmas with my family. I mention that not because I expect any of you to care, but to explain why this week’s article will deal with the prospects for energy markets in 2017 a couple of weeks earlier than is customary.
Before we get into what to expect next year, though, it is worth looking back on 2016 and seeing what lessons we can learn from the two big energy markets, oil and natural gas. Both are markets that are frequently volatile, but even taking that into account this year has been one of wild swings.
(Click to enlarge)
(Click to enlarge)
After starting the year virtually in freefall both natural gas (top) and WTI (bottom) turned around in the first quarter and have since more than doubled in price. In both cases, though, fundamentals have actually changed little and it appears that the anomaly was the low point early in the year. Yes, we have an agreement from OPEC but that came recently once the move up was almost over and has not yet taken effect. Similarly natural gas has benefitted from the beginning of exports and many power plant conversions coming on line, but inventory builds are still the norm. It seems clear that the fears that drove WTI below $30 and natural gas to around $1.60 were overdone.
I guess the lesson to be learned from the first half of the year, therefore, is an old one…when fear dominates the market and is the motivation for a move, opposing that move is the only sensible thing to do. Markets always overreact and tend to revert to the mean. The trader or investor that understands that has a huge advantage.
So, how do we apply that lesson in our analysis of what 2017 may bring? I learned a long time ago that one time Yankees manager, Casey Stengel, was right when he said that “Predictions are hard, especially those about the future”, and that that is definitely the case with energy markets. That said, though, given where we are now and what has caused us to get here we can have a stab at predicting at least the next few months for WTI and natural gas.
Basically what has pushed WTI to current levels is the opposite of fear…hope. The hope is that the OPEC deal will hold and have a real effect on global supply. There is also hope that the “Trump Effect” will boost growth in the U.S. and therefore elsewhere. In both cases,…