Commodity Outlook: Early-Summer 2011

06/24/2011 8:00 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Factors including the end of QE2, the debt crisis in Greece, and the peak summertime travel period are all weighing on commodities. Here’s what commodity traders should look for this season.

The Fed is expected to end the quantitative easing policy known as QE2 today, which will wrap up its $600 billion Treasury buyback program. If the Fed, as expected, makes it clear that the money printing is coming to an end, then we may see short commodity sellers once again have confidence to make a stand in the marketplace.

If you were a commodity bear, it was very tough. You were playing against a stacked deck. The Fed had unlimited power to print more money and was willing to do so. It created an environment where commodity bears had to think twice before taking a short.

The QE2 Effect

Stepping in front of a Fed-driven commodity train made it more risky to be short despite the fundamentals of the moment. The Fed had the power to change the fundamentals by not only devaluing the currency, but by changing the fundamentals.

By artificially stimulating the economy, it would increase demand for commodities, not only in the US, but in the hot and expanding emerging markets. Not only had those governments—like China’s—moved to diversify its holdings in dollars, they looked to commodities as a dollar alternative.

The Fed feared deflation and tried to create inflation by creating money out of thin air. It changed the entire commodity trend and drove away the deflation demons of that particular moment. The commodity bears knew that the Fed could run the printing press and change the fate of a commodity.

All Eyes on Greece

Yesterday, all eyes were on Greece and the confidence vote in the new and supposedly improved Papandreou government. It appears it passed the test, as traders expected. The euro may have rallied a bit, but oil seemed unimpressed. So now the market will focus on the Fed and those precious oil inventories.

The American Petroleum Institute seemed to suggest the return of the Keystone pipeline will show that oil supply will continue to build. Yet it may be the signs of rising oil production around the globe that will help the oil bears’ hands.

The International Energy Agency is seeing signs of increased Saudi Arabian production, and Kuwait and even Venezuela seem to be increasing production. The Brent crude versus the West Texas Intermediate (WTI) spread seems to have topped out, so Brent should continue to move closer to WTI.

NEXT: How Summer Travel Will Impact Gas Prices This Summer

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Summer Energy/Transportation Outlook

David Bird of Dow Jones reports that nearly one million fewer Americans will travel by automobile over the July 4 holiday than a year ago due to high gasoline prices, according to a survey by AAA released Wednesday.

Car travel over the holiday period:

  • Will drop 2.7% from a year ago
  • 32.8 million Americans will be hitting the road between June 30 and July 4
  • Travel will be down from 33.7 million a year ago

This year's figure is down from the record 35.1 million auto travelers hit in 2002, 2005, and 2007, but above the recession-hit 2009 low of 26.7 million travelers. Still, auto travel will make up 84% of total holiday trips.

Expectations for airlines:

  • More than three million travelers (8% of holiday travelers)
  • 9% rise from a year ago
  • 11% rise in the average price of the a round-trip ticket for the top 40 US air routes
  • The remaining 8% of travelers will go buy rail, bus or watercraft

Gasoline Prices

Although the national average retail price for regular gasoline has dropped 21.5 cents per gallon from a year ago, at $3.637 a gallon on Tuesday (June 21), the price is 33%, or 90 cents a gallon, above a year ago, according to AAA Daily Fuel Gauge Report.

AAA said it expects prices to be around $3.60-$3.70 a gallon during the July 4 holiday weekend.  

The number of total travelers making trips of 50 miles or more during the holiday weekend by all means of transportation will be down 2.5% from a year ago, to 39 million Americans, AAA said.

A survey of intended travelers showed that 56% said gasoline prices won't impact their travel plans. Of the remaining 44%, most said they would economize in other areas to pay fuel bills, while some would take shorter trips or travel by different modes of transportation.

By Phil Flynn of PFGBEST Research

Phil Flynn is a senior market analyst at PFGBEST Research and a daily contributor to the Fox Business Network. Read can his daily energy report and e-mail him at pflynn@pfgbest.com.

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