Matt Smith, founder of Energy Burrito and a commodities analyst for Summit Energy, explains the fluctuating prices of oil and natural gas.

Full Transcription:

Ben Lack: I’m here with Matt Smith, Founder of Energy Burrito. A fantastic oil and natural gas commodity blog and a commodities analyst for Summit Energy. Matt, thanks for the time.

Matt Smith: Thank you. Good to talk to you.

Ben Lack: Can you talk to us a little bit about why you started with Energy Burrito?

Matt Smith: Well, firstly, why it was started was really just to provide another avenue to get ideas out there for what Summit is thinking and what they’re looking at. Why I came up with the actual name, Energy Burrito, the tagline for is “Financial market ingredients diced and wrapped in an energy-flavored tortilla.” And the reason for that is I spent the best part of a decade in investment management before I moved into the energy industry, and I was schooled to believe that asset classes influenced each other. And so coming here to Summit, I’d seen that energy is just another one of those cogs in the engine room really. And so really the whole thesis behind Energy Burritos is seeing how all the different asset classes such as equities, bonds, currencies are affecting energy and vice versa, how energy is affecting all these other things such as currencies, et cetera.

Ben Lack: Very cool. And so I assume you are taking a lot of the experiences that you’re having with Summit to provide your own insight on what’s going on with the markets for the Energy Burrito blog.

Matt Smith: Yeah, sure. It’s really just what may be pertinent that week or just some things that is sort of taking my fancy, that I think is something that’s pretty interesting that’s happening in the market. And not necessarily just in crude oil or U.S. natural gas. We’re a global company, and we also do analysis on European power, U.K. power, U.K. natural gas, et cetera. And so it’s really looking at any of these various global commodities just to kind of highlight them and really try and explain a bit about them while giving a bit of an entertaining spin on them as well.

Ben Lack: So what are the variables that would impact the types of risks that are associated with some of the commodities that you guys analyze?

Matt Smith: All markets really are generally driven by supply-and-demand. And so if we look at crude oil, at the moment, supply is really dictated by OPEC and then there’s the non-OPEC countries. And really in terms of demand, what we have seen, we’re seeing the developed countries and the developing countries, this whole kind of transitionary period here where demand was driven by the developed countries. Now we’ve had this kind of global recession where the developed countries have been hit the worst, and now we’re really seeing demand being driven by developing countries, these bricks. Brazil, Russia, India, China, these emerging markets really drive demand there. And so it’s the whole global dynamic going on in terms of the supply-and-demand side for crude oil.

In terms of U.S. natural gas, in terms of the supply side of things, we have all of the production in the U.S.. We also see imports coming in as well from such as Canada. And we also see L&G from places such as Trinidad and Tobago. In terms of demand, say, the U.S. natural gas, it comes predominately from four different sources. You’re seeing from residential and commercial which are predominately weather-driven. Then you have the industrial side of things which is economically driven. And then you have the small part, the power generation which is really dictated by economic and also by the weather too. And so all these markets are driven by supply-and-demand, but they all have their own different dynamics going on then. That’s what makes them so great really.

Ben Lack: I know we are coming up to the summer months. Is the weather going to impact how the markets either change as they rise or drop over these next couple of months?

Matt Smith: Sure. In terms of U.S. natural gas, we’re really see what I believe is an anti-relief rally. We’re seeing relief sell-off really as we come out of winter. Although winter was relatively normal, we had a cold December. We had a cold February. We’re seeing stocks depleted down now to be around the same level as last year and the five-year benchmark, the five-year average. And so now we’ve come out of this winter period, and now we’re into these shoulder months where the heating demand is coming off and cooling demand will be coming on in a few weeks time. So it’s really a transitionary period when markets are sold off because it’s this relief sell-off like I said because the unknown of winter is now over. And now we’re just in that period where we’re just waiting to start to move into these warmer temperatures and hurricane season and see how that is going to drive prices as well.

Ben Lack: Does the fact that the summer months is more of an increase in transportation because families are taking vacations and folks are having more free time? Do you guys see that that’s going to have an impact this year on the rise or drop of oil prices?

Matt Smith: Very much so, especially more for the products. In terms of gasoline which makes up the largest portion of the U.S. usage of oil products, we’re going to start to get into driving season. We’re already seeing a return in demand now that we’ve got to wait for sort of February which really kind of skewed things because of the snow, et cetera. And so where crude has really been driven in the last year by non-fundamentals. It’s been driven by general risk appetite. We’re now starting to see the focus shift back towards those fundamentals, and those fundamentals are improving.

Ben Lack: And so for the supply side of the conversation, what types of major factors, I mean, there was a big finding on the Barnett Shale recently which is just giving the United States about a hundred years of inventory that we could pull from. Do those types of findings, whether it’s natural gas or crude or other types of commodities, do they really make a book on how prices change or are there other factors that really play into what causes the price to rise or drop?

Matt Smith: I, personally, look at a number of different things. It depends on who you really speak to as to what the answer to that question would be. I look at technical analysis, and so I follow the charts. And so those basically ignore fundamental changes. I also believe sentiments. Sentiment is also something that is dictated by non-fundamentals. That said, I really believe you have to look across the spectrum of all the tools that you have.

And so particularly, say, referring to finds like in the Gulf of Mexico for oil, or in the Tupi fields in Brazil, et cetera. Or in U.S. natural gas when there’s these shell finds and those increasing LNG coming in. These really have to be taken into account, but that’s all part of the price of discovery. And that’s something that happens over the forward curve as much as it does on the initial pricing. And that’s mainly because an immediate impact that these finds are having. Obviously, the Shale is going to come on over the next few years, and also the discovery of these oil supplies is also going to take time to come to market.

Ben Lack: Interesting. Well, do you have any final thoughts for the folks listening in to this interview that are either in the commodities market or interested in just what the commodities market is doing? Do you have any final words for them?

Matt Smith: Only that I think the next quarter 2010 is going to be vital, and it’s going to give a decent amount more clarity as to where prices are going to be going. And that’s because I believe the next quarter, we’ll start to see how the economy, whether it’s going to be a sustained recovery that we’re going to see. I think, like I say, this first half of the year, we’re really going to start to see a little bit of concerns about a global recovery and that’s going to play into oil, I think, in the near term. Obviously, natural gas is going to have a tough quarter just because of the shoulder months leading into the hurricane season. So I think really the next quarter’s going to be fascinating, and it’s really going to lead into the second half when we will start to either see a gradually ramp up in pricing across commodities because we’re seeing equity markets recover. We’re seeing interest rates start to rise, et cetera, on the horizon. Or we’re in a situation where we’re seeing a stalling in the U.S. economy. We’re seeing a bubble bursting in China. Then there’s going to be some real worries coming into the markets across this broad section asset classes. It’ll be a great quarter.

Ben Lack: Well, I appreciate you giving us the high-level view of kind of what you guys do every day and casting a little foreshadowing on what might be expected in the days, weeks, and months ahead. Thank you so much for the time, and we look forward to speaking with you soon.

Matt Smith: Sure. Thanks for listening.

Ben Lack: Take care.

Related Posts: