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).  


Popular posts from this blog

Trucker shortage? No a plan to allow driverless rigs

There are still articles on how America is running out of truckers -- and that its a huge problem, except its not a problem, if it was a problem salaries would rise to so that demand would clear. Trucking is one of those industry where the vast majority of participants are owner/operators and therefore free agents.

Salaries and cost are extremely well know, "industry" complains that there are not enough truckers, yet wages continue to fall... Therefore there are still too many truckers around, for if there was a shortage of supply prices would rise, and they don't.

What there is though is something different; there is a push to allow automatic rigs to "operate across the US", so to encourage the various authorities to allow self driving rigs you talk shortage and hope that politicians decided that "Well if people don't want to work, lets get robots to do the work" or words to that effect.

This has nothing to do with shortage of drivers, but every…

Every punter says oil prices are on the rise: Oil hits $48/bbl -- lowest since September 2016

What the hell?

How could this be, punters, advisors, investment bankers all agreed commodity prices  in general and oil prices in particular are on the rise...its a brave new era for producers and exporters -- finally the world is back and demand is going through the roof, except not so much!

What happened?  Well energy is complicated, the world operates in a balance -- 30 days of physical reserves is about all we've got (seriously) this is a just in time business.  So the long term trend always gets hit by short term variations.

Global production over the past 12 months has risen by somewhat less than 1.5% per annum.  As the world market changes production becomes less energy intensive (maybe), but the reality is that the world is growing more slowly -- America Q4 GDP growth was around 1.9% (annualized) Europe is going nowhere fast (the GDP growth in Germany is overshadowed by the lack of growth in France, Italy, Spain (lets say 27 Euro members generated a total GDP growth of 1.2…

Paying for research

This morning I was reading that CLSA -- since 2013 proudly owned by CITIC -- was shutting down its American equity research department -- 90 people will be affected!

Now the value of a lot of research is limited, that is not to say that all research is bad. In fact, I remember that GS's Asia Aerospace research was considered the bible for the sector.  Granted, there was little you could do with the research since the "buy" was for Chinese airlines...that were state owned.  Still it was a vey valuable tool in understanding the local dynamics.  It seems that the US has introduced new legislation that forces brokers to "sell" their research services!  Figures of $10,000 an hour have been mentioned...

Now, research can be sold many times; if GS has 5000/6000 clients they may sell the same research 300x or 400x (I exaggerate) but this is the key -- Those who buy the research are, I presume, prohibited from giving it away or selling it, at the same time the same rese…