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TFC Commodity Trading Forum

What Traders Should Focus on in 2013 *LINK*

We see the two most important market developments in the New Year has the United States now being well on the road to energy independence, and a bear market for the Yen. Both will have long range implications for commodity and financial markets.

The U.S. Energy Industry
The amount and quality of crude oil being drilled in North Dakota and Montana is nothing short of amazing when compared to main stream estimates just 2 years ago. The current boom will have long-term implications for both commodity prices and the national economy. The first thing that comes to mind is we are back to 2-way commodity markets for the first time in years. Before tapping the Bakken Oil Formation in North Dakota and Montana, and the leap forward in drilling technology this brought, traders had good reason to consider playing commodities from the buy side only. For years the bull market in crude oil fed into other commodities, and the boom / bust cycle became a boom / correction cycle. The commodity sector --from food, to energy, to precious metals -- was seen, because of population growth and improved health conditions, as a perpetual bull market. That has changed. Gasoline prices at the pump in the U.S. Midwest have dropped 25% in less than a year, showing everyone that ever-higher commodity prices is not a chronic condition. In fact Energy Department officials in Washington are now concerned of the effects of long-term lower prices, which could hurt the reborn U.S. energy industry. What this likely means for the energy markets, and the other commodities markets, is they may no longer move like the asset class markets they were so highly correlated to over the last 3 years. Perhaps this is also why gold and silver, commodities that have acted like carry currencies in recent years, has been lagging these past months? Commodities have always had an Achilles heel. It’s called supply. And not many people predicted the supply could come online like it did for crude oil.
Another big plus brought about by the increase in North American energy production is it tempers the negative effect on global energy and financial markets from potential conflict in the Middle East. The U.S. and Canada will always be seen as more stable trading partners than the Gulf States – if you have a choice you will always fill up the family car at a gas station in a nicer neighborhood. Any way you look at it, a return to two-way trade for commodities is the likely environment going forward. Lower commodity prices are also a plus for the global economy -- and central bankers know this.

There are always two sides to every market. And the biggest threat to lower commodity prices is climate. Another low precipitation winter and spring followed by a summer like the last two for the U.S. grain belt could push corn to $10 per bushel. Rain water is also integral to continuing to drill in the Bakkan. To bring one barrel of crude oil to the surface means flushing 4 barrels of fresh water -- unrecoverable -- down the well. Locals call the convoys trucking in that water the “mechanical river”. It is estimated that the oil and gas industry in the Bakken region will require as much as 5.5 billion gallons of water per year going forward. That is a lot of water needed at a time when underground aquifers are stressed from persistence drought conditions. The region currently has the water needed, but everybody relying on the new energy industry, and the old agriculture industry, needs to keep their fingers crossed that precipitation, or more specifically nature, reverses her current hot, dry trend. “Grain needs rain” as the old saying goes, and so does the U.S. energy industry.

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What Traders Should Focus on in 2013 *LINK*
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