Link to Energy Markets Stronger

VANCOUVER - Mar 14/08 - SNS -- Stronger relationships between field crop and energy markets are giving specialty crop markets participants pause as international oil prices continue to establish new record highs -- trading over U.S. $111 per barrel during the past week.

The need to incorporate energy markets into ones thinking about field crops was underscored by Goldman Sachs this week, when it said markets for sugar, corn and motor gasoline markets are converging on an energy basis. This reflects demand for agricultural feedstocks by the biofuel industry. Consequently, if energy markets are bound to continue rising, there is a good chance agricultural markets will maintain an upward trend. Conversely, the more dependent the world economy becomes on biofuels, the more difficult it will be to push energy prices below agricultural values, Goldman Sachs argues.

What makes such ideas more interesting is the belief the run up in oil prices is not yet done. Goldman Sachs makes the argument crude oil could reach U.S. $200. Other analysts are looking for something closer to $144 in the coming year. At the other end of the scale, Morgan Stanley is looking for oil prices to average $95 a barrel this year, while Alaron Trading's Phil Flynn says he has shorted April crude at $110.20 a barrel, with a stop loss of $111.20.

Oil market bears see a multitude of problems which will prevent oil markets from continuing to advance this year. A key problem, from their perspective, is that while oil consumption rose 2% during the first quarter of 2008, world output rose more quickly at 2.5%. Oil output is forecast to rise 3.3% above last year in the second quarter and 4.1% above last year in the third quarter. By contrast, consumption is forecast to rise a lackluster 1.6% over last year through the end of September.

Slipping consumption is a major problem for Alaron Trading's Phil Flynn. "(G)as demand growth, which has averaged 1% of average growth over the past six years, is barely averaging 0.3%. Yet (gasoline) prices continue to soar to record highs. . . . What is driving gas is the price of oil and supply and demand for the dollar. Gasoline is made with crude that is trading at record levels. According to the EIA 50% to 60% of what you pay for gasoline is directly related to what the world is paying for crude. And you have to remember that crude oil is priced in dollars.

"Oh and how has the dollar been acting on world markets?," Flynn says, "Demand for dollars seems almost non existent. The dollar fell to a record low as the world is convinced that (the United States is) in a recession. Things are so bad that some are saying the Euro Zone has surpassed the US as the world's strongest economy because of the dollar woes. Sovereign wealth funds, hedge funds, banks, oil producing countries, exporter that service the US are doing everything they can to get rid of their dollars before they lose any more value.

"This situation with the dollar is a direct result of the fall out of the liquidity crisis and it impact on the world's perception of the US economy. The Federal Reserve has cut rates aggressive and that has added to the dollars woes and in my estimation has been directly responsible for added at least $20 or $30 dollars to the price of oil. Oil prices are treading in dangerous territory as oil and gasoline are being played more as a hedge against the dollar and has little regard for supply and demand."