Thursday, April 23, 2015

Have you noticed oil prices? They're up!

This morning while doing my usual, review of the markets, and really some of the numbers are strange.  First off, yield over the past 24 hours they've been going up -- 6 bps.  Now, 6/100 of a percentage point doesn't sound like much, but its a lot.  The problem is that no one knows why the sell-off is occurring.

The markets are quiet, (a little down, but nothing really serious), and yet oil prices are going up real fast (again, sure the Saudi's are bombing Yemen again, but really that's northing new.

Things are strange, I mentioned two weeks ago that the market was expensive -- its just off its 2007 high (when looking at e/p10y) so its considered "toppy" but its been there for a while.  My guess is that the rats are getting nervous,  Facebook had a crappy performance based on fundamental problems in the sector -- there's just so much space for revenue growth, and overall cost of buying new customers has risen.  Numbers out of China are disappointing (the PMI is off -- back into contraction), and this despite the Chinese government's aggressive easing (in particular reserves)  and overall comments from the likes of Caterpillar are very negative for China.

The US shale oil & gas sector (financed largely with junk bond) is getting increasing pressure, and more serious China's seems to have backed off its "implicit guarantee" of state owned firm's debt obligations.

As the saying goes: "Its never just one thing".  Oil prices are going up because people realize that the storage issue is not nearly as serious as everyone implied.  In fact. there is still lots of storage capacity available in the US, and there's still lots of quiet VLCC available as standby storage.  So what happened people started being more sanguine about future oil demand, and their ability to hold on to oil for a period of months/years -- after all, interest costs are low, vessel hiring costs are low... So what you do (among other things -- you sell very liquid low yielding assets, and you buy higher yielding ons -- that are less liquid).

I'm not saying that everyone is doing this, but the oil market is just a barometer, and the treasury market is another barometer -- at one point the yield gets too low, and asset re-allocation takes place. Again, there's no certainty, it could also just be another "Algo going crazy", its happened before.

Finally, the impact on Canada is massive (oil prices), the CAD which was down as far as 0.782 to the USD is now back to .822 - a 5% rise in the currency.  That's after 18 months of "collapse".


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