Energy Prices Rise to Begin Q2

The first quarter of 2013 were a complete roller coaster ride in the energy space.  We saw U.S. gasoline futures de-couple from Brent crude prices on RIN speculation and natural gas prices close the quarter back over $4.00 per million BTUs for the first time in nearly 2 years.  Quietly, with the continuing saga unfolding in the Euro-zone, we’re finally seeing real movement in the Brent-WTI spread.  After threatening to break through significant support at $106.50 per barrel, Brent has turned it around and closed the first day of Q2 at $111, while WTI crude continues its march back towards $100 per barrel. Natural gas futures held above $4.00 and that portends a continued rally through Q2 as supply restrictions and falling rig counts are having their effect on price.

Brent crude put in a stunning reversal bar last week that brings into view a move back towards $115-120 by the end of the month if there is follow through this week.  With natural gas and WTI prices acting as confirmatory signals I feel very comfortable with making that call.

If the central banks are serious about stoking money velocity, which has been falling like a rock since the beginning of QEIII/IV, then scaring money out of people’s savings accounts will flow very quickly into energy commodities, driving up prices.  This will not be an overnight sensation, but rather a slow burn that will begin to push inflation expectations higher.  Energy, gold and, to a lesser extent, bonds will be the beneficiary of this.

About Tom Luongo
Tom is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.

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