We find it rather amusing to observe how punters/bloggers (call them what you will) are so engrossed with the whole "QE2" thing and how popular it has become to trash the Fed and/or Bernanke, yet beneath their feet, life goes on. I say this because it appears people are more concerned with what Bernanke is doing rather than taking note of what is happening on the commodity front and in particular within the energy group of commodities, that is; crude, coal, uranium, and ethanol. In essence, the energy group has been locked in a trading range since October of last year, but now some 12 months later, there is evidence from a broad based perspective that energy commodities have broken out of their trading ranges. We would not take things too seriously if there was bullish action in one or two energy commodities, but when there is strength from crude, heating oil, diesel, gasoline, bunkers, ethanol, uranium, and coal - well, you better believe that something is happening. But, is the strength in energy commodities only due to the actions by the Fed to debase the USD? Well, yes, that is what the average analyst/blogger/commentator would have us believe...but has anyone considered what is happening outside the US, and Europe for that matter? From an economic expansion perspective, what is going on in Asia (ex Japan), China, India, South America, Australia? Do you know that over 50% of the world GDP is accounted for by so called emerging markets? OK, to get straight to the point, energy demand is increasing rapidly. What happens in the US and Europe is now of little consequence. OK, that is perhaps an exaggeration, but I hope that you get my point. I think there is a lot more at play here than just the Fed debasing the value of the USD. There is something else that needs to be considered, and that is the world oil and gas and rig count. Capacity was reduced dramatically during the GFC, from some 3500 in mid 2008 to some 2000 a mere three months later. Although capacity has improved over the last 18 months (now about 3165) we are liable to feel the fall-out from this almost total shut down some 2 years ago. Of course, there wasn't exactly any expansion to write home about for quite sometime on the coal and uranium capacity front either up until mid last year. Just as Newton observed in the physical world that for every action there is an equal and opposite reaction, the same applies to the financial/economic world as well. The efforts of the Fed, capacity shut down, the rapid recovery of emerging market nations, and the change in global energy use is transpiring to create a dramatic explosion in energy prices than we had in early-mid 2008. Well, maybe crude at $200 barrel within 18 months may not be such an off the wall idea after all.

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