Friday, 13 February 2015
More oil, more growth, less deflation and a 'what if'.
The Brent Oil price time machine has taken us back to Dec 14th 2014 and the excuse of ‘its just a short squeeze’ has been eroded by time. The calls for $20 oil, if they are still beng waved around, have been pushed out from 'soon' to 'some time’. If we want a model on how these calls wax and wain we just have to compare them to the Euro breakup calls that go back to 2011. Great if you have an infinite time frame for your free option of rightness but a nightmare to trade and remain solvent against.
One of the regularly touted reasons to be bearish is the levels of reserves in the US, which I can understand impacting WTI, but the move we are currently seeing is being led by Brent which I assume is outside that SPR mandate. The Brent spread to WTI is really impressive now, so are you really sure US reserve data is massively important?
In my last post in a confused state, I said I had exited long oil trades because they had performed massively in a short term and now it was less clear. However the lack of a roll over (just when it looked like it would roll over) and break to new highs has me looking for laggards in the oil sector, to the point of overlaying Brent and oil stock prices to se what is out there. One or two look as though they have some catching up to do - Premier Oil? And yes, for full disclosure I have bought it this morning on the Brent/stock price spread argument.
But as mentioned in this recent post, it would appear that complacency in longer term oil prices has been the backbone to many deflation trades and whilst the ‘just a short squeeze’ argument was holding out then related trades could be excused any doubt. But with the latest spike I would not be surprised if we start to see some contagion into other asset classes. In old 'Macro Man' parlance - The Pink Flamingo Effect. To start with other commodity linked zombies might perk back to life. Rio Tinto has seen a surge as it is starting to distribute some cash but cash rich commodity companies in general are in my sights.
On to the other thing - Europe. There are so many internal variables involved that it really should not be seen as one trade, even if non-Europeans like to see it a such it needs to be played by sector and by country as there are multiple forces to balance. Return of growth, falling rates, politics, individual country solvency and the usual round of long term structural problems vs short term fixes. If we consider the long term structure of Europe as an Egyptian boy and Euro-policy as a sticking plaster then it is probably best to consider Europe as the mummy of Tutankhamen.
But growth is returning and before you argue, lets at last try to agree it is returning more than most had forecasted in November. And oil is up (did I mention that before?). Is this as deflationary as the markets are currently pricing? Probably not but the question is - is it as deflationary as the ECB is adapting for? With my views on the outlook for Bunds already massively anti-consensus the icing on the cake would be that European data starts to pick up not only enough to steer the market away from collapsing yield expectations but even to, dare I even suggest it, be enough to delay the ECBs first tranch of QE.
Now THAT would be a win for ECB policy, German pride, Denmark, Switzerland and the nonsense of negative yields and a loss, on the red hot pokering level, to just about every consensus trade out there.