Energy prices and commodities, generally, continue to participate in the volatile environment gripping global financial markets. It is an open question whether or nor crude oil can now maintain triple-digit levels. It was pretty clear, yesterday, that wholesale liquidation was occurring across all markets.
Crude oil prices fell more than $10 per barrel and gasoline prices were down more than twenty cents – a silver lining to this economic mess. Harbingers of economic malaise abounded in the commodity space: copper broke under $3 per pound, corn was down, and even cotton was limit down (a circuit breaker), at one point. Are folks going to stop buying Levis?
As far as energy prices holding up, in general, it’s becoming a difficult case to make. If there is a last shoe to drop to engender a steeper sell-off for energy prices, it will be a real contraction in Asian demand. With European financial institutions now fully engulfed in the financial crisis with their US brethren, it is difficult to envisage China, in particular, going it alone, along a path of the type of economic growth it has enjoyed over the past several years.
The major downside target for crude oil is the area around $86 per barrel, which, in technical trading terms, relates to the double-bottom set in January and February, earlier this year. However, to the extent the overall economic situation stabilizes, crude oil is likely to trade several dollars either side of the century mark. (Kilduff discusses recent market moves in the video)
Investors looking for a safe haven should look to natural gas and natural gas companies, as prices for gas have been relatively stable, and they appear to have achieved significant support at the $7 level. Occidental Petroleum got beat up pretty badly, yesterday, and EOG Resources are two that should benefit from the relative price stability of natural gas and the emerging winter heating demand that is just around the corner.
The energy crisis has been pushed to the back burner–pardon the pun–by the financial market concerns and yesterday’s dramatic failure of leadership on Capitol Hill. The credit fears represent a tide that is sinking all boats. The inter-connection between commodity markets, currency markets, bonds, and equities is stark. But it was not always this way. I do not know, if we will ever return to the days of basic fundamental analysis ruling commodity price direction, but the valuation of many companies in the energy sector are factoring in a substantial discount to current and even much lower levels.
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As things rebound down the road, energy demand will be an early indicator and energy stocks should reflect this re-emergence. As you decide where to invest in the aftermath of this tumult, take hard look at battered energy names, which have a portfolio of producing assets close to home or with business lines that stretch into Asia.
For someone that has been around since before the stock market crash in 1987, I believe we will come through this situation. There has been a large wringing out of excesses, as we have now witnessed the demise of many storied firms. There will also be new leadership in the White House come January, whomever you support, it cannot come any sooner. Also, Congress will have much greater will, after the November elections to tackle the problems that face our economy. They cannot come any sooner, either.
John P. Kilduff Senior Vice President Of Energy at MF Global Ltd. He's also a CNBC contributor.