Diary of a Commodity Trader: Getting in Front of the Coming Energy Crisis

By Kevin Kerr, President and CEO, Kerr Trading International

As the World begins to show signs of a slow awakening from the economic implosion of 2007-2009, the window of opportunities for getting a handle on energy prices is rapidly slipping away. When crude oil hit $147, most of us who have been trading it for a number of years felt that the price was not sustainable. Clearly we were correct. There is an old saying that traders use and it was drilled into my head back when I was on the trading floor at the ripe age of 19. The cure for high prices is high prices. The same saying holds true for extremely low prices as well.

First Blame All the Speculators

When we saw oil prices fall from $147, the unwinding was dramatic and quick. Prices for crude actually got back down to $36 briefly and the hand wringing and blaming of speculators commenced. We saw government and regulatory investigations commenced immediately and the result was they uncovered little if anything, except maybe a free market doing what it does, trade free.

Prices quickly ramped back up to the $80 level and have been there ever since, regardless of the global economic condition and weak demand and oversupply. So what will happen as we start to see demand pick up? It’s a safe bet that oil prices will not go lower. Speculators and all of the new trading products certainly contributed to the volatility in the energy sector but quickly supply and demand brought the markets in line again – that is the entire purpose of price discovery and it worked perfectly. The problem with focusing solely on speculators is that it simply fostered the denial that got us to $147 in the first place. Crude at $90 was, and is, sustainable just with demand and pent up demand as well as growth, even in a slow economy. The reality is that the time we wasted blaming speculators on running amok has simply taken away from any time spent on meaningful conversations about real solutions, or why the price spike happened in the first place.

At $140 we began to hear earnest conversations about drilling offshore and in Alaska. We saw consumers begin to look seriously at hybrid vehicles, and most importantly we saw significant investment in alternatives. Everything from ethanol to solar and nuclear to shale was gaining momentum and investor interest. Suddenly as oil prices fell, all of that progress evaporated. The consequences of this will be grave, especially for Western economies that are completely dependent on foreign oil.

Boom to Bust: Denial is not just a river in Egypt

Like any addiction, the oil addiction in much of the World, especially America, is insidious and one key element that keeps that addiction going is denial. Denial is powerful and unfortunately it is leading us right back down the path for even higher oil prices this time around. Pain has always been a great motivator and clearly oil at $147 caused pain to consumers and the government, now I think it will take oil at $200 before we see real angst again. The reality of Chinese demand is the fact that the countries thirst for oil products is growing by at least 5% a year and likely much more. As the populations of both India and China grow their middle classes and continue to purchase cars, better food, and other items, demand for energy will only grow.

Leadership and a true energy policy for the United States is sorely lacking if not non-existent. Policy makers seem to simply be adrift in a sea of problems. As regulators try to appease the public and find the smoking gun that caused high oil prices, precious little is being done to find real solutions. The only good news is [if you want to call it that] a "price limit" of about $100 a barrel that likely will only stall things temporarily. When crude reaches $100 again economies would likely rapidly switch to alternative fuel sources. However that demand is unlikely to fall fast enough to match dwindling supplies and as a result, unrest could still occur as people are forced to rapidly reduce their oil consumption.

Getting Serious About Alternatives

The truth is that oil supplies are dwindling and while new oil field discoveries are being made, the costs of extracting that oil will be significant, those costs will get passed on to consumers at the pump. On hand supplies cannot last forever and key suppliers such as the Cantarell field in Mexico are facing peak oil and dying. Cantarell is down to around 1 million BPD and dropping, for Mexico the impact will be devastating. The Mexican government gets around 40% of its revenue from PEMEX and the oil exported from Cantarell. The first symptoms of a genuine oil crisis became more and more apparent in 2007 as PEMEX was forced to cut back on exports to the United States.

While more oil maybe in the region it won’t be easy or cheap to get to. Major drillers like Exxon and BP can’t, and won’t, get involved in projects in Mexico because of government restrictions and costs. Other exploration projects from the Arctic to the Gulf hold promise but also come with a big price tag and even worse they will take years to develop. The prognosis for consumers is not good for the next decade and if we don’t get serious about getting ahead of the curve on this issue it will surely be the demise of the Western economy.

I recently spoke to CNBC and Larry Kudlow, as well as, Addison Armstrong of Tradition Energy; all are deep in denial about the coming high prices for oil, in my opinion. Two weeks after this interview, crude oil was $5 higher and gasoline prices spike up 20 cents or more at the pump nationwide. You can decide for yourself by watching the interview: http://kerrtrade.com/blog/?p=1034. The days of cheap and easy to find energy are gone. Those of us traders who know that are already ahead of the curve, and as traders, that’s always a good place to be.

About Kevin Kerr:

Kevin Kerr is a TV and radio investment advisor, his unparalleled expertise in futures and commodities has made him a regular contributor to news outlets like CNBC, CNN, FOX News, CBS Evening News, Nightly Business Report and many others. Recently, he was even featured on Jon Stewart's The Daily Show. What's more, Kevin has traded commodities professionally for the last 19+ years. Kevin began his career on Wall Street in 1989 acting as a currency arbitrage clerk on the former New York Cotton Exchange and has worked on and owned seats on several of the Commodities Exchanges in North America.

About Kerr Trading International:

Kerr Trading International is a diversified commodities firm providing education, trading and consulting services worldwide. In the fast paced commodities markets it can be difficult to find someone who wants to take the time to help you understand the potential profit opportunities as well as the risks involved in today's markets. KTI is a full service commodity research company and advisor that always puts its customers first. www.kerrtrade.com