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Market rally remains 'elusive'

Sam Fletcher
Senior Writer

A sustained rally in oil and gas commodity prices "will be elusive" as markets search for a self-supporting recovery and a reduction in asset market volatility into 2010, predicted Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, in his first report of the new year.

"Commodity indices posted their worst performance in recorded history last year, primarily due to the collapse in spot prices," Sieminski said. Moreover, he said, "We expect global oil demand growth to be significantly worse in 2009 than consensus forecasts." He predicts crude prices "will not hit rock bottom until the end of this year as OPEC production cuts work their way through the system and global growth starts to recover." He said a necessary condition for commodity prices to recover requires a significant reduction in risk aversion levels.

Meanwhile, Sieminski said, "The US natural gas outlook is being tempered by the US recession and the possibility that new LNG export facilities in Asia and the Middle-East will offload product in North America. However, the US gas rig count is falling rapidly and, in our view, this suggests that gas production could be contracting by up to 1% by the second half of 2009."

In a separate report, Olivier Jakob at Petromatrix, Zug, Switzerland noted that in the first full week of commodity trading in 2009, West Texas Intermediate reversed most of its price gains from the last week of 2008, trading in a wide $10/bbl range.

Jakob reported, "The average volume trading in crude oil futures during 2008 made a new record. If we bring the annual volume traded in crude oil futures to a barrels per day basis, then in 1995 a volume corresponding to the daily world production was traded each day on the futures exchanges. In 2000 the volume trading on futures was double the world production. That jumped to three times over in 2005, and in 2008 it was close to eight times the daily world production of crude oil that was traded each day in crude oil futures. This jump in volume has also brought a jump in volatility and is an input that needs to be taken in consideration when making a price forecast, or comparing current prices to history."

The curse of Sisyphus
Sieminski said commodity markets currently are "suffering the curse of Sisyphus," the ancient king of Corinth who, according to Greek mythology, was punished by the gods for his trickery by being condemned for all eternity to roll a heavy boulder up a high hill only to watch it roll down again each time before he reached the top.

"Like Sisyphus, we believe the ability of world growth to push commodity prices, and specifically energy and industrial metal prices, higher in 2009 will be fraught with difficulties," said Sieminski. "In fact the current episode of volatility, as measured by the Chicago Board Options Exchange Volatility Index, is second only to 1929. We believe the longer asset market volatility takes to subside, the larger the downside risks to global growth and commodity prices will be."

He said, "In terms of duration, if the current high level of volatility continues until March, it would be on a par with events in 1932."

Sieminski said, "What may interrupt this negative price outlook is not only new money being put to work in the complex but also the aggressive monetary and fiscal action being adopted by central banks and governments around the world. For example, in the next few weeks both the US and Europe will announce new fiscal stimulus measures to cushion the economic downturn."

Another view
Sisyphus's curse is usually seen as an allegory for a repetitive attempt to complete an unrewarding, backbreaking task. But Albert Camus, an Algerian-born French author, philosopher, and journalist who won the Nobel prize for literature in 1957, provided a different interpretation in the Myth of Sisyphus, a 1942 philosophical essay.

Each time the boulder crashes down the hillside returning to its lowest level, Sisyphus standing near the summit before starting down to try again is at that moment "superior to his fate," Camus argued, adding, "He is stronger than his rock."

He said, "Sisyphus teaches the higher fidelity that negates the gods and raises rocks. …The struggle itself toward the heights is enough to fill a man's heart. One must imagine Sisyphus happy."

That same description might apply to many of the oil men who stick with this industry through all of its booms and busts.

(Online Jan. 12, 2009; author's e-mail: samf@ogjonline.com)


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