Teeing off: Commodities from the 18th hole

Some people love sports.

Some people love energy.

Matt Smith loves them both — which is why the Summit Energy analyst is back with another guest entry mingling the two.

In the past, Matt shared his take on the World Cup through the energy prism. He’s back today with a look at energy markets past, present and future in relation to that intercontinental golf duel, The Ryder Cup.

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As Padraig Harrington teed off in the opening foursomes of the last Ryder Cup, crude oil was at $105 a barrel, and natural gas was at $7.50 per MMbtu.

Fast forward two years, and the energy landscape has radically changed through oil spills, recessions, and shale revolutions; oil is now around $80 after falling to $32, while natural gas has halved to around $4.

Yet as the latest Ryder Cup gets underway in Wales, pricing has evolved this year to become as steady as Jim Furyk, although this situation will change before the next Ryder Cup swings around.

Looking back

Being a Brit, it was exciting to host the last Ryder Cup in Louisville (my new Kentucky home). When the crowds at Valhalla were shouting ‘Boo!’ as a rallying call for an unlikely hero, Texas tea was already on the slippery slope lower (but still in triple digits), ultimately falling to a low of $32.40. But the roller coaster ride didn’t end there; after hitting rock bottom in late 2008, both black gold and equities bounced in 2009 with a turnaround in risk appetite. The biggest trick shot was by OPEC, who implemented supply cuts using remarkable discipline – a word not normally associated with the cartel.

The aftermath for a Brit in Louisville after the Ryder Cup in 2008 was miserable, but nowhere near as harsh as the tussles faced by the natural gas market.  After reaching a high of $13.69 in July 2008, prices plummeted through the end of the year. Natty continued to move lower through 2009 to eventually land at $2.40. The ‘shale revolution’ brought further supply to market even as prices fell, with production still profitable at such paltry levels of $3 and $4. Paltry, it turns out, may be the new norm.

Looking forward

The trend for crude to be a proxy for risk continues; while multi-decade high inventories in the US weigh crude and products down, the prospect of continued rampant emerging market growth acts as a counterweight. Natural gas faces a more challenging battle to push higher, as record domestic production continues through shale plays, more than mitigating lackluster supply from conventional sources, liquefied natural gas flows or Canadian imports.

And even if industrial demand for natural gas were to show the fighting skills of Phil Mickelson (or for my benefit, Ian Poulter), improving energy efficiencies are aiding to offset this increase in productivity.

What will the landscape for Commodityworld look like when the throngs head to Medinah Country Club in Illinois for the 2012 Ryder Cup?

Natural gas prices should remain handicapped by the double bogey of cheap shale gas and repressed US growth stymieing industrial demand, while crude will likely move higher as energy-intensive users in emerging markets drive the global economy onward. While price volatility was the star at the time of the last Ryder Cup, calm is the king of this one. As for Medinah, higher prices will be indicative of a better global economy.

— Matt Smith, Commodity Analyst at Summit Energy and author of the blog, Energy Burrito.

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