BY Alan Plaugmann,

Head of Futures and Fixed Income, Saxo Bank

It is quite interesting to note that as the stock markets make new highs and commodities rally, we still regard ourselves as living in uncertain times. And even though there are signs of a global economic recovery, it is good to remind ourselves that credit is still tight, thus leaving consumers and new investment funding very scarce.

Even though most are looking for some sort of consolation through government involvement, we need to remember that any signs of a recovery must be born out of real demand, which is something that only business and consumers can fuel.

The International Energy Agency (IEA) marked one major concern surrounding the fall in refinery, pipelines and oil drilling investments, in that what we fail to invest in now, we pay for in the future efficiency of energy consumption, as business and households contribute to a falling demand in terms of general usage. And although there are many conservationists who will appreciate lower energy consumption, specifically on fossil fuels, what we do not invest in oil efficiency now, we pay for in the future, too.

The IEA names specifically the Association of Southeast Asian Nations (Asean) as an area for large growth, citing growth levels of up to 75 percent in energy demand over the next 20 years. As growth levels appear to be relatively healthier than many other parts of the world, demand growth could find its leader through the Asean.

Lest we forget the other side of demand, being supply. US commercial stocks, gasoline stocks, distillates all are at levels that deviate largely on the upside from last year’s levels at this time, with levels that are even a lot higher than what the typical upper boundaries of stocks are, even. In addition to this, the days forward supply cover is 13 percent higher than cyclical averages. For those of you who are well versed in reading energy stock data, you will know that there is typically very little correlation between stock data and the price of Crude, especially. However, over time logic will lead us to believe that one does have influence on the other.

The end to our current uncertain times is one of the biggest unknowns to us all at present. Even though there are signs of a recovery, it is safe to assume that it is very likely that it could also take some time. Moving back over time at looking at the price developments of Crude oil since making highs above $148.00, we have clawed back roughly half of the losses, with WTI Crude trade in the region $76.50 at present.

The market has set a very strong trend, with even a move towards the $68.50 on the downside leaving it inside a bullish trend. Anyone who makes an overlay of an S&P500 index chart versus a WTI Crude chart will see a very high degree of price correlation. Many believe that if equities rally, then this is a sure sign of a recovery. On a short term basis, this has showed itself to hold true.

The US unemployment rates recently published sent equities lower, and WTI Crude oil down with it, posting a $2.00 loss on the day. The next day we saw gains in Crude, in line with the gains that were posted by equities. Leaving equities aside, the market technicals show $76.50 as being a key level in the short term. If the short term relationship holds true surrounding equities and crude oil, then we will have to see a drop in equities before we see any further downside in crude.

On a longer term basis, we need to be sure and examine the fundamentals surrounding the market. With this is mind, we need to hold true what are the real drivers of the market over time, namely supply and demand. What we know for certain is that oil stocks are very high. What we also know for certain is that demand is still very much lower, with little certainty about when a full recovery will prevail.

Future oil inefficiencies will definitely be a main force to reckon with in the time to come and on a fundamental basis, unless this is addressed in the short term, will be pushing prices higher. However, inefficient energy use comes at a high cost, which will not be good for equities. In other words, be wary of following short term trends too rigorously, because the path to recovery will only be found through sound fundamentals.the peninsula