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.


hipper said...

Good call on oil here, and I recall you said that already in a January post.

However as I recall from multiple articles talking about supply costs I've read during the peak of the oil carnage, have to wonder how far it can run in the long term in the case that the supply dynamic really has changed as those articles suggest. I mean shale oil etc. newcomers.

Generally the guesstimates for shale cash cost production break-evens run wildly over the place, but still a common factor for most of them are that they are nowhere near $100/bbl. Not even 90, but $80 and under. In the short term these guys might be in trouble but I guess the point is, that in the long term the new tech and deposits are here to stay and eventually someone will take advantage of them. That might be a limiting factor with staying power for the price to go nowhere near where they were. I think previously OPEC did have very large control controlling most of the supply, which enabled high prices, but no longer does that apply.

But that still doesn't mean that oil couldn't wildly swing up in the medium term as a result of the lack in new supply capex and future contract speculation. I've also read that shale oil production has very high decline rates, which if true suggests that they need periodic re-drilling and moving equipment etc. all of which costs money.

Glad you mentioned the other zombie commodity bunch. Right now they seem to be showing life even without the dollar weakening. I just can't figure out what the dollar is going to do next, but just in case someone else is right and it would like to fall I think commodities (besides oil) are a good play (think as an insurance) here. Particularly I'm in RIO and BBL, in the latter you get exposure to oil as well, but RIO seems to me to have the best balance sheet of the base metal miners. Besides that I have the pure oil vertically integrated Europeans RDS, BP and ESV from the driller side.

Polemic said...

Thanks Hipper, to be honest I don't know if it will go much higher and a 60-70 area would seem sensible. But I am just wondering how the $20cllers ill see their game pan out - and I point you to the post after this for how they are sounding right now.