Skip to main content

Oil Prices, Recession & CAD


Many oil market analysts have argued that a backwardated market is a bullish signal because it suggests tightness at the front end of the market. The other side of the debate (which is where we land) is that a backwardated market is one in which market players believe prices tomorrow will be weaker than they are today. The last time we were in a backwardated market was in late September/early October 2008 when prompt oil prices were trading between $90 and $100 per barrel. Three months later we touched a low of $32.40.

 Ok so the bread and butter of the CAD is oil prices -- specifically oil prices priced in the WTI (don't know why there is high correlation with that index -- and not Brent or West Coast...).  Barckwardation is an anomalous condition in physical commodities it can be caused by two distinct reason:  funny enough at either extreme of the economic cycle.  First high spot price are based on a view that supply is tight, in a rising demand environment (Economic growth) will lead to rising supplies (eventually) hence forward prices are lower.  The other argument is that future prices are lower because there is an expectation of demand collapse -- caused by recession.

ECRI's model assumes that America is on the verge of a recession (the last time they predicted a recession was in 2007) and they have an excellent track record.  The other reality is that with the Greeks, Portuguese, Irish, British, Spaniards and now Italians all cutting government spending, a recession is a given in Europe.  Governments account for a much larger percentage of GDP in Europe (in France, government expenditure accounts for 42% of GDP).  Italy and Spain are the only two economies that matter here with 12% and 8% of Europe total GDP -- a cut in their growth rate will be felt accross Europe.

News out of China are not good, everyone in the business is "praying" for a soft landing there, but it is hard to imagine how the Chinese government could orchestrate such an outcome, especially since inflation remains a stubbornly high!  A hard landing in China, a recession in Europe and America would spell doom for oil prices -- maybe not into the $40/bbl range but it could easily drop by 30% or 40%.  

Needless to say that a multiple recessions across the planet would have a negative impact on the CAD, on our exports would suffer (obviously).  





Comments

Popular posts from this blog

Ok so I lied...a little (revised)

When we began looking at farming in 2013/14 as something we both wanted to do as a "second career" we invested time and money to understand what sector of farming was profitable.  A few things emerged, First, high-quality, source-proven, organic farm products consistently have much higher profit margins.  Secondly, transformation accounted for nearly 80% of total profits, and production and distribution accounted for 20% of profits: Farmers and retailers have low profit margins and the middle bits make all the money. A profitable farm operation needs to be involved in the transformation of its produce.  The low-hanging fruits: cheese and butter.  Milk, generates a profit margin of 5% to 8%, depending on milk quality.  Transformed into cheese and butter, and the profit margin rises to 40% (Taking into account all costs).  Second:  20% of a steer carcass is ground beef quality.  The price is low, because (a) a high percentage of the carcass, and (b) ground beef requires process

21st century milk parlour

When we first looked at building our farm in 2018, we made a few money-saving decisions, the most important is that we purchased our milk herd from a retiring farmer and we also purchased his milking parlour equipment.  It was the right decision at the time.  The equipment dates from around 2004/05 and was perfectly serviceable, our installers replaced some tubing but otherwise, the milking parlour was in good shape.  It is a mature technology. Now, we are building a brand new milk parlour because our milking cows are moving from the old farm to the new farm.  So we are looking at brand new equipment this time because, after 20 years of daily service, the old cattle parlour's systems need to be replaced.  Fear not it will not be destroyed instead good chunks will end up on Facebook's marketplace and be sold to other farmers for spare parts or expansion of their current systems. All our cattle are chipped, nothing unusual there, we have sensors throughout the farm, and our milki

So we sold surplus electricity one time last summer...(Update)

I guess that we will be buying an additional tank for our methane after all.   Over the past few months, we've had several electricity utilities/distributors which operate in our region come to the farm to "inspect our power plant facilities, to ensure they conform to their requirements".  This is entirely my fault.  Last summer we were accumulating too much methane for our tankage capacity, and so instead of selling the excess gas, that would have cost us some money, we (and I mean me) decided to produce excess electricity and sell it to the grid.  Because of all the rules and regulations, we had to specify our overall capacity and timing for the sale of electricity (our capacity is almost 200 Kw) which is a lot but more importantly, it's available 24/7, because it's gas powered.  It should be noted that the two generators are large because we burn methane and smaller generators are difficult to adapt to burn unconventional gas, plus they are advanced and can &qu