There is an easy way to find out where the market thinks a particular sector is heading: Check out the movement of futures contracts held by top hedge fund managers.
These days the signal is clear and pointing in one direction. It's in energy.
Reports have recently surfaced that hedge funds are moving into commodities in general, and energy commodities in particular. What's more these moves are more bullish than at any time since midsummer.
The reason is the same one that we have been discussing for several months. Demand is coming back more quickly than anticipated.
Energy spikes usually start that way. Indicators of market resurgence seem to rush onto the scene, catch analysts by surprise, and the acceleration begins.
But this time, those who survey the market should have seen it coming. After all, the indicators and benchmarks have been there. I have been laying them out here in Money Morning for weeks.
Two elements have emerged over the past several days that finally require the pundits to catch up with us.
First, it is becoming impossible to ignore what is happening in the U.S. and China. Both markets are moving up, with that direction intensifying of late.
In the U.S., forward economic indicators are developing into a bull market signal. This has augmented the run we have experienced of late, largely due to the combination of an oversold condition, no bad news (Congress and the White House may at last be learning how to play nice in the sandbox), and money moving back in.
But it's the second factor that everybody will be talking about this week.
U.S. and China Growth Higher than Expected
Investment flows back into equities are quickening. Indications are that over $2.2 trillion came back into stocks thus far in January, the best one-month showing in years. With a pause in European concerns - business confidence moving back up, the European Central Bank establishing standards for cross-border banking, and the credit crisis appearing to ebb - the improving American picture is a genuine stimulus to share prices.
China is not the only place where energy demand is an issue. Much of the developing world, especially countries relying on rising industrial bases, is in the same situation. Much of this discussion is also off the mark. It takes a quarter or more for the figures to tell us anything of consequence, but it is the immediate knee-jerk reaction that propels stock market sentiment these days.
In the face of fears that Chinese growth may fall below 7% (can you imagine that, a figure in the high 6s is in a harbinger of doom), some of the pundits began talking about a pull back. Well, China's main economic analysis institute came out with their projection for 2013 national growth last weekend.
It was 8.4%!
And we are back to the races. In the aftermath, movement into crude oil futures by hedge funds was at a four-month high earlier this week.
All of this talk about economic recovery acceleration in the U.S. and renewed growth expectations in China, along with the spikes in energy seen in other parts of the developing world, translates into expectations of increasing demand globally.
Now, there are estimates to back this up.
Global Demand Set to Rise
Last week, the Paris-based (and U.N. connected) International Energy Agency (IEA) has said price pressures on the international oil market have suddenly tightened, mainly because of unexpectedly strong data for demand in the U.S. and China in the last quarter of last year. By the way, notice the quarter-long threshold needed to begin discussing tangible figures, something the pundits can't get into their 30-second slot on TV.
The IEA then announced it is raising its forecast for 2013 global oil demand by 240,000 barrels per day from its estimate released only last month. The new total of 90.8 million barrels per day is 930,000 (or 1%) more than in 2012. OPEC is also likely to be raising its estimates in the cartel's next report.
An aside of interest, while there is considerable excess reserves available in both conventional and unconventional (shale and tight) oil worldwide, it still takes time (and capital investment to extract. The currently available and sustainable volume capable of being brought to the market is about 94 million barrels a day.
No point in getting worried yet about a supply shortage.
But this condition will be resulting in higher prices.
The IEA also noted that a dominant factor in the global energy market now "has a lot to do with political risk writ large, and not just in Syria, Iran, Iraq, Libya or Venezuela," and includes regulatory risks. Such concerns will also raise prices.
As for my estimates, I still say in we will hit $105 a barrel in New York (WTI benchmark) and $127 in London (Brent) by March 31.
The hedge fund movers and shakers seem to agree.
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