First of all, the value of the US dollar is key. It all kicked off in July last year when the greenback started appreciating against all currencies. Since then, on a trade weighted basis, we saw the fastest appreciation of the US unit in thirty years. Over the last nine months the Swiss franc got off relatively unscathed, down just 8 per cent. In ascending order (of losses) we have sterling at 14 per cent, the Australian dollar down 17, the euro down 20 and Scandinavians losing 27 per cent of their value; some emerging market currencies fared a lot worse. Will this frenzied run continue? We feel it has probably run its course against the majors and an uneasy truce will dominate the FX market again this year as has been the case since 2009.
US Dollar Index
Over the same period crude oil prices slumped reflecting in part the increased buying power of their pricing unit - US dollars per barrel. Brent blend dropped from $115 per barrel in June to $45 in January, a whopping 60 per cent cut. Also keep in mind is that since 2009 the spread between Brent and West Texas Intermediary has ballooned after trading around parity for the 20 years before that. With North American shale production ramping up, Brent has traded at a premium of anywhere between $2 and $26 per barrel (currently $7.85). This will not continue ad nauseam and fracking becomes unprofitable. Therefore were the US dollar to reverse some of recent gains, crude oil prices will do likewise. Expect Brent to hold above $50 for much of the rest of this year, possibly crawling briefly to $75; Nymex slightly less stable, holding above $40 most of the time, creeping slowly towards $75 towards the year-end.
US Crude Oil
Natural gas prices are quite a different beast, having seen the most tremendous roller coaster ride in the first decade of this century - from $2 to $10 or $15 per 10,000 British Thermal Unit (MMBtu) and back again not once but on four separate occasions. Things have mercifully settled down very considerably this year, ticking along towards the lower end of the historical range, competing with demand for crude. Subdued price action is likely to continue this year, any lift in oil having a limited effect on natural gas. Therefore we shall factor in a range between $1.65 and $3.00 per MMBtu for the rest of this year - which would still be a potential doubling in price.
Natural Gas
Wholesale US unleaded gasoline prices usually react more slowly and less so to changes in crude. From a high at $3.15 per gallon in June, they matched the lows of 2005 and 2006, but held shy of 2008's record low at $0.785. We expect this futures contract to trade between $1.40 and $2.40 for much of this year, with sharp and sudden swings along the way.
Unleaded Gasoline
As a footnote, any recovery in the price of crude is unlikely to affect shipping freight rates, the Baltic exchange's Capesize and Panamax continuing to trade at their lowest in a decade.
MORE FROM NICOLE ELLIOTT...
Nicole Elliott is a long standing Member of the Society of Technical Analysts and has just taken over the IC's trading coverage. She is regularly interviewed and quoted by the financial media, is a conference speaker, and author of several books on charting.
