Lesson 2 Activity - Hidden

Lesson Activity

Note: You may wish to print this page to circle each corresponding decision (bearish, bullish, neutral) as you work through the scenarios.

Read each of the factor examples and scenarios given below for crude oil and then for natural gas. For each scenario, determine whether it could have a “bearish” (lower prices), “bullish” (raise prices), or neutral impact on the commodity price. When you are finished with the scenarios, tally the totals to arrive at your decision to buy or sell overall for each commodity.

Crude Oil Factor Examples

Read through these factor examples to help you with the scenarios that follow.

1. Weather – Heating oil, a crude distillate, is still used in several homes in the Northeastern US for space heating and hot water. This part of the country is the world’s largest consumer of heating oil. (And, many old industrial factories and power plants still use heating oil.)
2. Domestic Economy – The strength of the economy is a good barometer for energy usage overall. Indicators such as the stock market, manufacturing indexes, retail sales figures and unemployment numbers influence the perception of demand.
3. Global Economy - In addition, crude oil has truly become a global commodity, so world economic factors impact oil prices. (The health of the Eurozone, China’s manufacturing, etc.)
4. Currency – The strength/weakness of the US Dollar vs. other currencies directly impacts crude oil prices. Foreign investors trade crude oil contracts, which are priced in US dollars and cents. Thus, if the dollar is weak, foreign investors can buy more crude contracts with their currency. On the other hand, when the US dollar strengthens, foreign investment lessens and crude prices tend to fall. There is a very high correlation between these two.
5. Geo-Political Situations – Unrest in any oil-producing region gives uncertainty to supply, and therefore, to prices. The current situations in Egypt, Iran, Syria, and the pirating of oil tankers by the Somalis, all give rise to concerns about crude oil interruptions. In Nigeria, the rebel group MEND has disrupted the shipment of crude oil by attacking facilities owned by Royal Dutch Shell.
6. Cross-Commodity Markets – The price of crude can be impacted by the change in the price of the products derived from oil, such as gasoline and heating oil.
7. Changes in Inventory – The US government reports the change in the amount of crude oil that is in the nation’s storage facilities. Increases in this are deemed to be “bearish” (supplies have increased) while decreases are seen as “bullish” (there was demand for the inventory).

Crude Oil Scenarios

Determine whether each scenario could have a “bearish” (lower prices), “bullish” (raise prices), or neutral impact on the commodity price.

1. Weather – US forecast calls for high temperatures across the “southern tier” states with seasonal temperatures to the North and in the Northeast. (Bearish, Bullish, Neutral)
2. Domestic Economy – The Institute for Supply Management’s August manufacturing index was 52.5, down from July’s 53.1. (Bearish, Bullish, Neutral)
3. Global Economy – Europe continues to wrestle with the financial woes of Greece and Spain. China sees large increase in exported goods. (Bearish, Bullish, Neutral)
4. Currency – The US Dollar traded lower against the British Pound and Japanese Yen today. (Bearish, Bullish, Neutral)
5. Geo-Political Situations – The US Navy has successfully thwarted a Somali pirate takeover of a million-barrel crude oil tanker in the Gulf of Aden. OPEC decides to maintain current voluntary quotas. (Bearish, Bullish, Neutral)
6. Cross-Commodity Markets – the "peak" summer driving period is over but Americans drove 10% more miles than last summer.  (Bearish, Bullish, Neutral)
7. Changes in Inventory – The Energy Information Agency’s Weekly Crude & Distillates Report showed that 1.5 million barrels of oil were added to the nation’s storage facilities last week. (Bearish, Bullish, Neutral)

Natural Gas Factor Examples

Read through these factor examples to help you with the scenarios that follow.

1. Weather – Natural gas is definitely a domestic North American commodity. It is no longer influenced by world events or even the price of crude. So, the biggest factor affecting price is weather. About half of US homes use natural gas for space heating and hot water. In addition, about 25% of all electricity is generated with natural gas. This amount is actually increasing as the cheaper gas prices of the past several months have led to switching from coal to natural gas.
2. Economy – The same factors that impact crude oil prices have an affect on natural gas prices.
3. Changes in Inventory – The US government also reports the weekly change in the nation’s natural gas storage. Similar dynamics to crude inventories apply.
4. Power Generation – The mix of nuclear, coal, hydro, and wind power impact natural gas prices, but weather still dominates the demand for power, and as a result, the demand for natural gas usage.

Natural Gas Scenarios

Determine whether each scenario could have a “bearish” (lower prices), “bullish” (raise prices), or neutral impact on the commodity price.

1. Weather – US forecast calls for high temperatures across the “southern tier” states with seasonal temperatures to the North and in the Northeast. (Bearish, Bullish, Neutral)
2. Economy – The Dow Jones Index rose +100 points today. Unemployment increased, but the Consumer Price Index fell due to lower energy prices. (Bearish, Bullish, Neutral)
3. Changes in Inventory – The Energy Information Agency’s Weekly Natural Gas Storage Report showed an increase of +65 billion cubic feet. While this was less than forecasted, total gas in the ground still exceeds last year’s levels by +32%. (Bearish, Bullish, Neutral)
4. Power Generation – Eight of the nation’s nuclear power plants are offline for maintenance and refueling ahead of the anticipated winter peak load. The NW has an abundance of hydro power, while coal plants continue to burn cheaper natural gas. (Bearish, Bullish, Neutral)

For the next several weeks, you are to find information related to each of the "factors" listed above for crude oil and natural gas. Beside each one, state whether it would lead to higher or, lower, prices.  Post your findings on the course blog.

Directions for submitting your work

Part I: Create your Blog Entry. Begin a new entry to the EBF 301 course blog.
The blog entry should consist of two paragraphs: one for your trading decision to buy or sell crude oil, and one for your trading decision to buy or sell natural gas. You will need to post your findings in how you arrived at your decision to buy or sell for each commodity. 

Part II: Read and comment on other students' blog entries. After Part I has been completed, blog entries from all students will be available. Read through entries by about 5 other students. Pick two of these students and write comments on their entries. Pick students whose entries do not already have a comment on them. If all of the entries already have comments, then pick students whose entries only have one comment on them. Also, pick students whose entries are interesting to you for any reason.

Grading Criteria

You will be graded on the quality of your participation. See the Blog Discussion Rubric for specifics on how this assignment will be graded.