oil futures

One of the things I have learned from almost four decades of doing this is that oil and gas specialists know a great deal about what they do for a living.

However, few of these specialists really understand enough about what the person to the right or left of them does. This tends to breed tunnel vision.

And these days it has become a serious problem.

That's because what is now hitting the oil and gas markets requires a more expansive and integrative understanding of what is actually taking place.

The truth is energy markets are evolving.

We are entering a period in energy and oil prices that I have begun calling the "New Normal."

You see, a volatile, dynamically changing combination of factors now undermines the traditional way of viewing oil and gas markets.

And it is about to get a whole lot more unnerving for the average analyst who still insists on pushing square pegs into round holes.

Unfortunately, for the old school aficionado, we are rapidly moving into new territory. Here, market machinations are occurring that defy the "traditional" explanations.

Oil Prices and the Talking Heads

You know what I mean by "traditional."

The talking heads on television try to explain the latest spurt or dive in oil prices by relying on the same trite and tired lineage of explanations.

In just the last month, we've seen movements in energy prices justified solely on the following factors:

• A supply glut in Cushing, Okla.;
• Fluctuations in the euro-dollar exchange rate;
• The European credit crunch;
• The latest unemployment figures;
• Inflation;
• Manufacturing, housing, or production figures.

But it really doesn't work this way anymore. While such factors are not completely irrelevant, they are also not calling the shots.

There are several factors contributing to this New Normal, but I will be restricting my comments this morning to just three.

They are:

1. The balance between conventional and unconventional production;
2. Increased market volatility; and
3. Global geopolitical matters.

So let's get started.

Today I want to focus again on oil prices. It seems that some TV pundits have never heard (with apologies to Alexander Pope) that a little knowledge is a dangerous thing.

Some people on Wall Street believe that by scaring the individual investor they stand to make a greater profit for themselves.

Over the summer, there was a report issued by Credit Suisse that said that oil could hit $50 a barrel. We've also seen predictions on CNBC saying $40 a barrel. Others think that oil prices could fall even go further.

What I am telling you now is that these views do not reflect the actual market or the new reality we find ourselves in today.

A lot of this sentiment stems from the idea that we have now increased our supplies here in the United States. Some political candidates even said that they guaranteed "$2.50" per gallon gasoline if they were elected.

"Drill, baby, drill" has become something of a national catchphrase.

The problem is that prices are not just reflective of new supplies, either too much or too little. By focusing only on how much is there, these analysts provide a fundamentally distorted view of the oil market.

Yes, the rise of new sources has altered the picture. But so has the rise in demand globally and at a rate much faster than anticipated.

In fact, the impact of unconventional oil (like our huge sources of shale oil) is now projected to be less than expected, even with additional volume coming on line.

And one report issued last week reflects that fundamental view and explains why oil prices are set to rise, not fall in this age of expanded unconventional oil and gas.

The Fundamentals Are What Matter to Oil Prices

I want to introduce you to a company called Bernstein Research.

They are regarded as the top energy research company in the world by their institutional investors. They're in 40 countries. They win awards every year for having the best analysts in the sectors they cover.

And they are very successful in their forward focus because they emphasize the fundamentals.

Last week, Bernstein Research released a detailed report reflecting the position I have been holding for some time-oil prices are headed higher.