Seeing beyond the blind curves of bailouts and meltdowns takes the keen vision of a veteran market observer, Roger Wiegand, Editor of Trader Tracks. In this exclusive interview with The Energy Report, Roger gives us his latest thoughts on the bumpy road ahead and where he sees opportunities in the energy sector.

The Energy Report: Roger, the last time we spoke, early in October 2008, you were predicting oil would reach a new high before the end of the year. Obviously that hasn’t been the case. What’s your take on what’s happened since then?

Roger Wiegand: What’s happened is that we thought oil would go to new highs, and it looked that way on the charts for the longer term technically. Other top technical advisors and institutions like Goldman Sachs had analysts’ prices that were pretty much in line with ours. They were looking at $150, $147 crude oil prices just like we were, and expecting them to go even higher. Then, of course, the credit crisis smash arrived and markets came down.

It was obvious at that point primary countries worldwide were headed into a deep recession, and there was a major and dramatic price reversal. Shortages for the longer term remain, but our crude oil price right now has come down a great deal simply because of recessionary factors. I would say that is the primary problem.

TER: And by recession you mean the demand factor?

RW: The demand factor, yes, even though gasoline prices in America have come down from $4 a gallon near the peak to around $1.46 or $1.50 at my local gas station, and gas prices continue to fall. The reason is people are simply driving less; there’s just less disposable income out there for leisure trips, vacations and those non-mandatory trips for work or shopping. Conservation and new savings ideas have taken a grip on energy.

TER: If we’re going into worldwide recession, and many have claimed that we’re in deflation and will continue in deflation for at least another quarter, what does that mean for commodities? Many people are still saying that we’re going to be in a commodity bull for the next 10 years, and this is just a little downward blip. What are your thoughts on this?

RW: The commodity bull has changed from the standpoint that as far as the commodities that we require in our everyday lives, those prices should remain firm and can rise with inflation. Among these would be food-related markets and gold and silver purchased and traded for security, safety and wealth protection. On the other hand, base metals for industry and those commodities used in discretionary purchases (autos, homes, appliances, furniture) sold down hard and can recover only very slowly or stay flat.

The energy markets have gotten pushed down so far due to falling demand and prices dropping from drastically overbought positions. Oil prices came down from $147 to $40. This week of mid-December, crude oil was trading in the mid $30.’s. Oil is currently trading in a weekly range of $40 to $50. The last major price support on our weekly charts is $20. Some are saying that price is coming next. A few weeks ago we would have thought that is impossible. Now, we are not so sure. We expect prices to stabilize in 2009 and then trade higher but, very gradually. Fundamentals on shortages still do exist, but we have got to go through a prolonged recessionary period with lower prices, I believe, before we can return to the higher prices that we had before. There is plenty of crude oil temporarily housed on large ships parked with no destinations.

TER: When you say higher prices than we had before, do you mean going back up above $100?

RW: I think we could go far above that, but we’re talking three to five years or more, out from now. All of these prices, whether they be crude oil or natural gas as a package, have been pushed down in a deflationary environment because of recession. Some are saying you are already seeing depression price levels in certain markets within the context of our entire global system. Here in my state of Michigan, industry in past years was always operating near peak demand, especially for industrial electricity. Now we hear electric power demand in Michigan is down over 10%.

For example, next spring, despite the fact that commodity prices came off highs in the grains, I think we’re going right back where we were before. There are still very high remaining costs of gasoline and diesel fuel embedded in products for farmers, especially in fertilizer, and cost of seed. In Argentina, for example, where they have done a lot of planting with soybeans, the government unexpectedly imposed higher new taxes to the tune of 40%. This was a radical increase and occurred while farmers hadn’t yet received all of their money out of the last year’s crop. This tax surprise caused immediate new crop under-planting. So, within the food area, we expect prices will continue to rise in the normal, inflationary cycles. Grains and gold remain our primary bull trades for 2009 with certain currencies. While some trades are expected to appear in energy markets, we think the bloom is off that rose for a long time.

TER: So, looking at the commodity bull market, somewhere along the line, core commodities such as food will have to increase.

RW: They will have to increase because there’s going to be shortages. We say grains prices will be going to be higher. We also think crude oil was so high and overbought that it can’t go back to previous highs for years simply because there is not that much pressure to buy it. Industrial and consumer credit is paralyzed. Nobody has any buying power and even the best companies lack longer-term staying power. Cash is king once again; just like the 1930s. In the U.S., a good percentage of farmers may not plant next spring, as they cannot get credit.

Let’s take some examples here. Natural gas right now on the weekly chart is $5.55; it’s been as high as $13 to $14, which is nearly triple where we are today. Our forecast for March and April 2009 is about $9. This is based upon technical and Fibanocci analysis [Ed. Note: Named for the mathematician Fibonacci or Leonardo of Pisa, who first published his Fibonacci numbers sequence in 1202. The Fibonacci sequence is used to detect and describe otherwise hidden patterns.]

The 200-day moving average is about $8.21. Normally for natural gas there is a rally in February through June for two reasons: February is the highest winter price month using natural gas for heating, and the following peak arrives in a July and August rally as natural gas is used in power plants to run commercial and residential air conditioners. A lot of people are not aware of that big spike, but if you look at natural gas this year we were about $8 and we went as high as nearly $14, and a lot of that growth came after May rising $10 to $14 during May to July. That price rise was mostly an air conditioning spike.

TER: What’s the prognosis for coal? Coal is in abundant supply here in the U.S.

RW: I do have a prognosis for coal. The best grade of coal is metallurgical coal (met coal), used to make stainless steel and other higher quality metals. Met coal comes out of central Appalachian mines versus steam coal (power plant demand) coming from Wyoming. Met coal costs roughly 40% more than steam coal. There are four different grades of coal mined in Illinois, North Appalachia, Central Appalachia, and the Powder River Basin. There are other mines in Colorado. The northern Appalachian coal is the best coal and it sold as high as $150 a ton in the last major rally. It has now come back to about $90 a ton. The highest price I saw on met coal—this is the best you can buy—was paid by Korea with a contract of $330 a ton. Those buyers might still be stuck paying that higher price on current contracts despite new deliveries costing only $90 per ton.

In looking at the Dow-Jones coal chart, it was up around $450 and went down to about a $100. It’s back to $200 again and the moving average is $435 for the 200-day price. We think we can regain those higher prices but very gradually over five years or more. Oil and gas came down severely as natural gas sank from $14 to about $5—that’s a big drop. Oil is down 70%. It collapsed from $140 to $40. And, with the break this past week under $40, some are now saying $20 is next! Now, coal didn’t do that. Coal came down roughly 20% on its prices. The primary difference is a higher percentage of coal demand is supported by power plants. For quite some time, China was turning out two brand new coal fired power plants per week!

So, while there’s been a drop in the coal prices, they have not really skidded down like some of the other energy areas. I think coal prices will come back a little bit, but what we’re going to see is a more of a stabilization. The difference between coal and something like natural gas and particularly oil, is that oil is in a fundamental global shortage. Coal is more plentiful but the recent price spike has more to do with transport and handling problems than pure out of the ground shortages. In the U.S., we’ve got a 300- or 400-year supply of coal. The fundamental problem is suppliers can’t get it from the mine and transport it to where it’s being used fast enough.

Tune in tomorrow for Part II of this article. 

About Roger Wiegand: In addition to editing and publishing Trader Tracks (http://www.tradertracks.com/), a stocks, futures and commodities electronic newsletter publication for active traders, Roger writes a weekly column, “Rog’s Corner,” for J Taylor’s Gold and Technology Stocks Newsletter. (See http://www.webeatthestreet.com for information on Jay Taylor’s and Roger Wiegand’s newsletters. Tel: 718-457-1426 Claudio Bassi, Manager cbassi@miningstocks.com.)

A native of Michigan, Roger has had an interest in precious metals and futures since the commodity rallies of the late 1970s and early 1980s. His background in a 25-year real estate development and construction career specialized in forward planning, consulting, and using creative skills for conceptual project thinking. His present work is focused on the precious metals, currency, energy and interest rate markets for trading on the primary American exchanges. Experience in land, development and base material projects has evolved into consulting for mining companies and analyzing those markets. He has developed longer-term ideas for finance and mining marketing doing work on behalf of private and public mining companies. Roger’s consulting work is to focus on concepts and “big picture” forward planning for mining companies. His newsletters utilize the global news, and his personal research and knowledge for expressing personal trading ideas.