Prices in the energy market are likely headed for a shakeup, according to the chief agricultural economist at a major bank.
Natural gas is currently mispriced in relation to crude oil, which isn’t sustainable over the long term, said Michael Swanson of Wells Fargo, which recently held an executive forum for timber companies to discuss economic factors.
Crude oil currently costs about five times as much as natural gas per British thermal unit, a common measure of energy, he said.
The futures market anticipates that crude oil’s price will fall in relation to natural gas in the coming decade, Swanson said.
However, the market suggests that crude oil will still cost more than 2.5 times more per BTU than natural gas in 2021, he said.
While oil is in a denser form than natural gas, which is favored in the energy market, it’s unlikely that such a large premium can endure, Swanson said.
The question is whether natural gas prices will come up or prices for other energy forms will be driven down, he said.
It wouldn’t be wise to financially speculate on this looming change in the short term, as the “market can stay stupid longer than you can remain solvent,” Swanson said, paraphrasing famed economist John Maynard Keynes.
Over the longer term, though, there’s a huge incentive to draw more natural gas into the transportation sector, he said.
Such a shift would then displace crude oil and ethanol, affecting those markets, he said.
Prices for crude oil will also likely be impacted by the rise in domestic production, which has reached about 8 million barrels a day, up from about 5.5 million in early 2011, he said.
Several years ago, if you had predicted such a high level of domestic oil output “you would have been told to keep taking your medication,” Swanson said.
Another topic discussed during the executive forum was the surge in agricultural exports to China, which has boosted demand for crops and timber.
The trend has certainly been positive for agriculture and forestry, but Chinese policy can disrupt exports and poses a risk, said Kevin Bergquist, agribusiness consultant with Wells Fargo.
“Although that’s tremendous growth, there’s tremendous opportunity for China to flip those markets in a heartbeat, and it’s really hard to predict that,” he said.
The recovering U.S. housing market has also been a boon to the timber industry, though U.S. monetary policy poses an uncertainty, said Mark Vitner, senior economist at Wells Fargo.
Home prices are up 10 percent over last year, but homeownership has actually dropped since then, Vitner said.
By trying to keep interest rates low, the Federal Reserve has basically driven investment away from bonds and into assets, thus boosting prices, he said.
When these stimulus measures eventually end, it’s unrealistic to expect the U.S. economy to resume the same growth trajectory it was on prior to the recession, Vitner said.
“It’s not that we’re not growing,” he said. “We’re just not growing all that fast.”