In this guest post, Alex Bellefleur, global macro strategist at Pavilion Global Markets, writes that the Bank of Canada was prudent to loosen monetary policy in response to the decline in oil prices.
Last week the Bank of Canada (BOC) surprised markets by cutting interest rates 25 basis points, leaving them at 0.75%. While some argue this move was unnecessary, we are of the view that the cut is needed as a pre-emptive manoeuvre to counter private sector deleveraging. Read more
Just a few developments to update oil watchers on. Plus one conspiracy theory.
First, John Kemp of Reuters observes on Thursday that gasoline demand is now at multi-year seasonal highs:
Central banks are just full of surprises these days, from Mumbai to Zurich to Copenhagen. Today, Ottawa:
The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada…The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the Bank’s monetary policy response… Read more
As already mentioned, this may not be your usual oil-price decline. But it’s also not crude’s first appearance in the 50 per cent club:
Now, in absolute terms the falls aren’t comparable ($100 to $50 versus $30 to $15) but there are similarities. Read more
Yup. Analysts and economists still can’t decide whether the fall in oil prices is net positive or net negative for the global economy.
Unfortunately for the net positive camp, it looks increasingly like global demand and growth figures are beginning to side with the negativity team.
Indeed, the longer the oil price stays low, the more it looks like global stimulus hopes were overdone due to poor understanding of financial feedback loops in the commodity space.
So what’s behind the anomaly? How did a whole school of economists get this potentially so wrong? Read more
There’s plenty of discussion about why the oil price collapsed (read Izzy’s take on the changed structure of the market, for one), but consider a broader question: if markets can be so wrong about the price of one of the most widely used and heavily traded commodities, what else are they missing?
We ask because a halving in the price of other markets may not be cheered in the same way as cheap oil. We also wonder what it says about how orderly (or otherwise) big market declines will be, when they eventually roll around. After all, major currency pairs don’t move by a fifth in one morning…
To that end, here’s a reminder of what a 50 per cent decline looks like for a selection of markets, and the last time that level was hit. Read more
A quick post to collate a few side theories on the reasons, justifications and consequences of the SNB move.
Simon Derrick at BNY Mellon is first to point out that the euro floor/chf celing was leaving an open door to safe haven flows from Russia by way of an open bid for euros. As he notes:
Compounding this was Switzerland’s role as a safe haven as the Russian crisis intensified. It was, therefore, not entirely surprising when the SNB decided a few weeks ago to impose an interest rate of -0.25% on sight deposit account balances at the bank and expand the target range for three-month LIBOR to -0.75%/+0.25%.
Lower oil prices are likely, on the whole, to be bad for Canada.
–Timothy Lane, Deputy Governor of the Bank of Canada, January 13, 2015
Unlike most rich countries, Canada is a net oil exporter. According to the US Energy Information Administration, Canada’s net exports of petroleum have more than doubled since 2005 to about 1.7 million barrels per day:
The parallels between the oil markets and bitcoin continue to astound.
Over in the bitcoin universe, for example, questions over the legitimacy of the $1,200 level achieved in November 2013 have begun to circle. The running theory is that the ridiculously high price was only achieved because Mt.Gox — Bitcoin’s premier exchange until it collapsed in February 2014 — was in league with manipulative HFT traders who, with the help of a proprietary algorithm nicknamed the “Willy Bot,” pumped the price as far as it could go, and then cashed out.
Over in the oil world, meanwhile, a similar dialogue is coming forth with regards to the record prices achieved in 2008. Read more
Some thoughts, musings, and simply fun items we’ve recently come across:
1) As of the start of this week, global non-energy equities have held up fine: Read more
The drop in oil prices – with WTI now drifting down towards $46 a barrel – has been nothing short of stunning.
On that note, here’s an interesting thought from Chris Flanagan, head of US mortgages and other structured finance research at Bank of America Merrill Lynch. When this securitisation veteran sees the fall in oil prices he thinks of one thing – the ABX index. Read more
$80 oil, $70 oil, $60 oil, $50 oil and counting… If you suspect the structure of the oil market has fundamentally changed, you may be on to something.
There was a time when all you needed to balance oversupply in the oil market was the ability, and the will, to store oil when no-one else wanted to.
That ability, undoubtedly, was linked to capital access. For a bank, it meant being able to pass the cost of storing surplus stock over to commodity-oriented passive investors and institutions happy to fund the exposure. For a trading intermediary, that generally meant having good relations with a bank which could provide the capital and financing to store oil, something the bank would do (for a fee) because of its ability to access institutional capital markets and its reluctance to physically store oil itself. Read more
Good news for those looking out for crude bottoms!
JBC Energy reports on Friday that the economics that make storing surplus oil in floating tankers profitable are finally in play. Contango, in other words, has returned sufficiently enough to the market to incentivize those intermediaries who have the physical means to store oil, to purchase it for storage purposes and delayed sales, thus helping to balance the surplus in the market. Read more
Fascinating what a few months of sub $90 per barrel oil prices can do to the dialogue about the respective merits of cheap energy.
So, whilst three months ago it was all about “trillions in stimulus from cheap oil!!“, today it’s “$50 oil changes everything!” and ARGHH “energy defaults may be the new subprime!”.
As FT Alphaville warned at the start of December:
If it is true that the commodity ecosystem is collapsing, then it is also true that all dependent industries are at risk. On that basis, those analysts who say that low prices will be a boon for many western economies that depend on oil imports, all miss that none of this necessarily guarantees increased demand.
Margins may be temporarily improved for intermediaries, manufacturers and retailers, but if we end up heading towards a price war on all fronts, all we get is a deflationary spiral that threatens contracts, salaries and debt.
This installment in our occasional and disjointed series into the risk of balance-sheet driven currency crises in EMs — based on the hidden debt that lurks beneath — features a new if well flagged villain: oil.
The broad question as ever is: have the majority of emerging markets still got manageable foreign currency external debt levels? And do they rule themselves out as candidates for a self-fulfilling currency crisis? Even when dark debt is taken into account?
Tl;dr: Yes, with a few exceptions. Read more
To be clear, I regret nothing. But here’s the real thing anyway, reasonably important stuff — what with prices in the eurozone falling for the first time in more than five years (do click to enlarge): Read more
While WTI crude prices fell through $50 per barrel levels on Monday, and still remain there on Tuesday… (chart via LiveCharts):
One of the still to be appreciated side-effects of falling oil prices is a reduction in so-called petrodollar recycling by oil producers.
As we’ve already noted, there are analysts who believe petro-induced liquidity shortages may already be impacting certain eurodollar markets. Furthermore, there’s also the fact that as liquidity shortfalls manifest in external markets, the opposite could become true for internal US markets. So, just as the dollar liquidity tap gets switched off externally, it gets turned on with gusto back at home.
But Bank of America Merrill Lynch’s Jean-Michel Saliba gets to the same point somewhat differently.
As Saliba noted last week (our emphasis):
Lower oil for longer could imply material shifts in petrodollar recycling flows. Petrodollar recycling through the absorption channel has generally been USD negative, helping an orderly reduction of global imbalances though greater domestic investment. Although recycling through the financial account is less well understood, the bulk has likely, directly or indirectly, ended up in US financial markets and has thus been USD-positive. A prolonged period of low oil prices is thus likely to lead to lower petrodollar liquidity with, in time, an allocation shift towards more inward-looking repatriation and financing flows, in our view.
For seasoned oil watchers the latest spew of “informed commentary” hitting the media waves is probably becoming nauseating.
That’s because everyone from Robert Peston and Peter Hitchens to Vitol’s Ian Taylor seem to have a view on the oil price decline, some making claims that “the market may have hit bottom”, others hinting that the fall was too “mysterious” to be market led and the latter even admitting that even oil traders can’t predict what’s going to happen next.
But it’s the words of Saudi Oil Minister Ali Naimi that matters most. And as he explained to Mees Energy on December 21 — echoing what FT Alphaville has been saying for a long time now — in a price war, everything turns into a market-share-based game of chicken, meaning there’s no incentive for the world’s most efficient and financially buffered producer to cut at all. (H/T Neil Hume for the Mees report.) Read more
By James Benton
With oil hovering around $57/barrel (for WTI) as of late Monday afternoon, now might be a good time for a quick look at the state of Canada’s enormous and expensive tar sands projects, and at the Keystone XL pipeline intended to help move what they produce. Read more
Back in 2011, inflation climbed above the Fed’s 2 per cent target, but the FOMC resisted the impulse to tighten monetary conditions. Long-run inflation expectations hadn’t risen to worrying levels, and Ben Bernanke perceived that a price spike led by oil was likely to be “transitory”.
No surprise there: he wrote the paper on this very topic. And he was proved right. Read more
Junk bonds, or to be more polite, “high-yield” bonds, have had a glorious bull run since the start of 2009. The Barclays index of total returns more than tripled in five years:
If history really does repeat itself, then the upside of the oil glut of 2014 could be some top quality kitsch TV drama moments in the not too distant future.
We’re going by Season 3, episode 7 of Dynasty, which first aired December 8, 1982.
The episode features Blake Carrington, CEO of Denver-Carrington, despairing about the prospect of becoming an oil tycoon in distress due to the 1980s oil glut and having to rely on ex-wife Alexis Colby (Joan Collins) for a bailout if his loans go bad.
Check out the opening two minutes and later at 24.30 for the scene between Carrington and the chairman of the subcommittee on energy policy and technology. Read more
The big story on Monday is the warning from the BIS that a resurgent dollar could disrupt EM markets due to the fact that collectively the region has three quarters of its $2.6tn debt denominated in the US currency.
Meanwhile, international banks’ cross-border loans to emerging market economies amounted to $3.1tn in mid-2014, mainly in US dollars, the BIS added.
And herein lies the key problem associated with the hypothetical eventuality of no more petrodollars. A major dollar squeeze in foreign eurodollar markets.
Not that the petrodollar is near its death just yet — the US after all is nowhere near energy independent. Read more
One of the problems with cartel systems is that when they bust apart they tend to take out not just their own industry but all the other industries that have come to depend on their ability to keep things balanced in their favour.
In fact, best to think of cartels and monopolies as an “ecosystem”, which allow a whole range of different lifeforms to thrive on the back of their ability to keep things in a permanent goldilocked state of not too much and not too little control.
Small surprise then that the repercussions of Opec’s non cut last week have turned to wide-eyed realisation for some market participants that the price function in commodity markets has never really been about the fundamentals as much as the dedication of certain entities to “not sell” volumes when they have them to hand. Read more
Friday, November 28th. It’s the day after Thanksgiving in the US – possibly the lightest trading session of the year. And here, buried under the turkey leftovers, we find two statements (click to read) …
That’s the CME handing out disciplinary action against Mr Igor Oystacher, one of the biggest individual fish in the deep Chicago derivatives pond. He’s been landed with a $150,000 fine and a one month trading ban. Happy Holidays Igor! Read more
The consequences of Thursday’s non-Opec cut are understandably harshest for the oil cartel’s weakest members, such as Nigeria and Venezuela.
For Nigeria, lower prices are a particular problem, not only because it depends on petrodollar revenues for managing imports (amongst other things petroleum products themselves) but because of its dollar debt exposure to key trading intermediaries, whose business models depend on the ability to provide credit intermediation services to Nigerian businesses and banks.
So whilst the sovereign may indeed have little exposure to a petrodollar dearth, the same cannot be said for Nigeria’s private sector. Read more
Those looking to intensively scrutinise and analyse Opec’s non-cutting decision would do well to check out the public statement from the cartel which can be found here.
In any case, here is the key par to take note of (our emphasis): Read more
As per Opec tradition, the cartel’s decision on Thursday has been leaked to wire reporters from Bloomberg and Reuters who are citing delegates stating…
OPEC KEEPS OIL PRODUCTION TARGET UNCHANGED AT 30M B/D: DELEGATE, BBG Read more
Some wise comments from our esteemed FT colleagues on Opec’s price war:
Cutting production only makes sense if there is strong reason to believe that the glut is temporary; and even then it makes better sense in low-cost fields, where not too much capital is tied up, than in high cost ones. Unless, of course, the oil price falls below the operating cost of a high cost field. That is thought to be about $7 a barrel in the North Sea. That is the economic reason why everything depends on Opec, which still controls much of the low-cost oil in world trade.
For the moment, most observers are betting that Opec is bluffing about a price war (which would in any case be the correct strategy) but this begs the question of maintaining internal discipline which is already frayed. Gulf peace and the addition of 2m barrels a day of Iranian supplies, could be the last straw.