September oil and other GFC nuggets

A quarter or two where the GDP manages a dribble of growth isn’t “out of recession”. If I’m right about the likely oil price reaction to any sustained return to growth, we possibly never will be.

The closing few days of September crude futures get us back on an interesting track.

As I’ve noted before, the most interesting trading days of each month are those between the close of options trading and the close of futures trading. At this point, speculators are largely sitting on their bets, or selling if they’ve done well, because there is a real risk that anyone who buys in this period is actually going to have to take delivery of the stuff (or at least sell it in the spot market for whatever price they can get). So, most of the buying in these three days is done by people who really want oil to use / turn into useful stuff.

And this time the price hammered upwards by 8.6%, which gives us some good news and some bad news. The good news is, this is real “green shoots” evidence. Demand for energy is growing, which suggests that world GDP is growing again. The bad news: looks like any sustained return to growth in world GDP is going to once again be tracked by sustained upward pressure on the oil price.

The entire futures trading period is contangoed – ie every future date is a higher price than all earlier dates, instead of being discounted for TVM / WACC / interest – tracking up to the high 80s at the far out dates, which indicates that at least traders generally think that the trend is up for the foreseeable future. The actual numbers for the out years aren’t in themselves significant, as they never get too far out of line with the current trading price – in fact the current 24% premium for 2015 oil over 2009 oil is about as high as it ever gets.

One result is that  we get some more confusion, as journalists duck the job of explaining the complexities (assuming they understand them): the new October contract was priced at the end of Thursday’s trading at around 50¢ more than the old September contract, which was OTOH 92¢ less than it had been priced earlier in the day. What’s the betting that this further rise in the price got reported as a fall? Well, let’s save you wondering.

SO, can we get a prediction for oil prices over the next year that’s anywhere near as good as my February ’08 spot-on prediction of a $145 peak for 2008?  Not yet: too many green shoots have withered to be able to put even tentative dates on the following conditional prediction: when world GDP rises by 6% from today’s levels, oil prices will rise back to $150 a barrel. Fortunately (?), this isn’t going to happen any time soon.

Stock Markets

“October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.”   Mark Twain

Much rebounding in the markets lately. For some reason each of these gets more heavily reported than the days when it falls back. I have a personal benchmark for when I’m prepared to believe that the markets are really on the up. I have to admit that there is no high rationality behind this, but then we are talking about stock markets here, where rationality is hard to find.

My benchmark is: “have the markets gone back above where they were at the beginning of 6 October 2008?” To save you looking it up, that was the start of a week in which the ASX 200 fell 16%, the Dow 18% and the FTSE 21%. The long slow decline from October 2007 peaks* found a cliff.

*  Again, to save you looking it up, the ASX200 was already down 31% from the 1/11/7 peak, the Dow 27% off the 9/10/7 peak, and the FTSE 26% off the 31/10/7 peak: by the end of 10/10/8, they’d evened out at 42% down, 40.5% down and 41.5% down respectively.

Lately they’ve been trading  at around what I call Wednesday levels. For the Dow we could also call this 1998 levels, for the FTSE 1997 levels. If they get back above Monday levels – ASX 4691, Dow 10323, FTSE 4981 – for a sustained period, we might reasonably say the market has recovered, at least until we get the reaction to that oil price prediction earlier in this piece.

The Future Fund

… would appear to have about as optimistic a view of the markets as I have. If they believed that the bull run was over, it would make no real sense to sell a third of their Telstra holding – either their greatest asset or their biggest millstone. But they did, which in my mind is a bet on the market right now being in a temporary peak. A big bet.

Ten Lost Years

When excoriating the Japanese resistance to anglo-saxon economics, there is a tendency to refer to the long period when the Japanese economy “stagnated” on level markets, almost-zero interest rates, big debts – and close to full employment, but that doesn’t get the same prominence. Well, here we are, with stock markets in the main a-s economies at late ’90s levels … But hey, we know better. See Ross Gittins’ articles throughout the last few months. A quarter or two where the GDP manages a dribble of growth isn’t “out of recession”. If I’m right about the likely oil price reaction to any sustained return to growth, we possibly never will be.