JPMorgan’s Black-Swan Risk That Could Clobber The Commodity Market

algae tbi

The commodity correction is closer to its end than its beginning, and prices are set to start rising again, according to JPMorgan’s Colin Fenton.

Fenton sees Brent Crude heading to $130/barrel by Q3 2011. He does, however, outline 5 risks to this outlook. The first are the typical, including rising prices triggering a U.S. rate hike, a Californian financial crisis, a U.S. debt ceiling crisis, and the government’s pro-natural gas turn.

There’s one, however, that sticks out for us.

Risk #5: The pace of innovation and deflation in tech. Genomic sequencing costs have dropped by 99.96% since July 2007, encouraging genetics-based technology that could displace coal and gas-fired generation. But before such novel tools reach scale, oil producers are already signaling they recognise the competitive threats from technology and policy: Europe’s third-largest oil producer last week announced its intention to acquire a majority stake in the second-largest US solar panel maker.

The other four appear to be iminent, but while this one is a little less pressing, it’s still important to touch on. That fall in genomic sequencing costs may allow otherwise slow moving developments like algae fuel to speed up. And it isn’t just about fuel, but all the other things we use the oil we take out of the ground for.

From CNET:

Out of a given barrel of oil, a significant portion–on the order of 15 per cent–goes to products other than diesel, gasoline, jet fuel, or heating oil, according to the Energy Information Administration. Many biofuel companies, such as Joule Unlimited and Kior, will first target the fuels market, but over the years a number of companies have sidestepped the challenges of supplying fuel by focusing on renewable chemicals or other products.

Aurora Algae, once called Aurora Biofuels, last year switched gears away from diesel replacement to food products, including animal protein, feed, and Omega 3 oils.

So the cheaper it is to do genomic sequencing, the faster these alternatives can be made. And note, those costs are in decline.


[credit provider=”JPMorgan”]