One last "I told you so"...

While I did not formally make a prediction on oil prices this year, the same forces I've described have continued to play out: since the WTI oil market is dominated by speculators, every attempt to push prices higher ends in a collapse when inventories "unexpectedly" rise. 

In mid April, based on geopolitical issues, WTI was trending toward $70, driven by speculative bulls of course.   As inventories started rising, the bulls pulled back starting in late April.  And now, as this Wall Street Journal article suggests, oil is on the verge of a bear market, approaching $50.

Despite our president's attempt to extol the virtues of "molecules of freedom," fossil fuels, oil especially, are facing long term headwinds of green energy that will keep prices in check.  However, I doubt this will dispel the best efforts of Hedge Fund speculators to hype another oil bubble....

Good luck fellas.

It's so predictable..

Just see my last post, "Lather, rinse, repeat."  While there has been geopolitical turmoil, the Iran sanctions, the problem is STILL investors--Hedge Funds--driving prices up to quickly, beyond CURRENT fundamentals, leading to inventory builds. 

Take note: a good sell signal is when so-called "analysts" claim oil will hit $100/barrel again.  They are much like bitcoin and gold enthusiasts who need additional buyers to maintain their ponzi scheme, so they can bail and take profits...

Lather, Rinse, Repeat...

Nothing earth-shattering to report; it's the same 'ol, same 'ol....

After breaching $70--the top end of my prediction for WTI this year, we are now seeing the usual pull-back in prices which is, as usual, being driven by Hedge Funds. As it became apparent a peak was reached in mid-July (just over $74), the hedgies unloaded 178 million (paper) barrels of oil the week of July 17th (see this Reuters article). 

Adding insult to injury, this week's inventory data showed an unexpected rise: the "consensus" was a draw of about 2.5 million barrels, however inventories rose by 6.8 million, which was the third increase in the past five weeks.

As we move out of the summer driving season, I think it's safe to say WTI will remain in my predicted trading range for the remainder of the year (always with the caveat no unexpected geopolitical event occurs...).

Moving forward, I have been meaning to write some posts on the economy in general.  As I mentioned in a previous post, I expect a recession sometime in late 2019 or early 2020.  I will expand on those thoughts in the near future.

A brief Oil Market brief

Having recently just eclipsed the $70 high end of my price range, WTI appears to be receding back into range. According to a Reuters article today:

 "A sea of red is washing over the energy complex as rising U.S. production coupled with a looming relaxation in OPEC-led cuts sends bulls scurrying for the exits," said Stephen Brennock, analyst at London brokerage PVM Oil Associates.

In addition, the article notes the most recent COT report shows that Hedge Funds have decreased their long positions, which signals they believe the price rise has run its course. This belief is based on the above noted recent increases in oil output by both US shale and OPEC, specifically the Saudis and Russians are relaxing the production cuts that were put in place a year ago to help re-balance global markets.

Barring further geopolitical issues (the odds of which are getting higher that one will occur with Iran!), WTI prices should remain on the high side of my range, from $60-$70.

Trump and the Jimmy Carter Experience

WTI oil has breached the $70 mark, the high point of my 2018 range.  As with any prediction, one can't forecast "events" that influence prices. The oil market is probably the most notorious market for having political events influence significant market moves. While the fundamentals have caused prices to move above $60, the $70 breach is a consequence of Trump's decision to abrogate the Iran nuclear deal.  This was a no-brainer to predict, as Trump is so easy to manipulate, especially for a puppet master like  Netanyahu (Iran is the big prize for Neocons and Israel).

Interestingly, there was a fairly significant rise in oil inventory last week, and if today's data show another build, then prices will be pitted between the fundamentals and the geopolitics. Fundamentals will win in the long run, but the geopolitics can wreak havoc on supply in the short run. That said, Trump's decision is going to compound the economic issues surrounding his re-election bid for 2020. I've predicted (elsewhere) that his tax cuts and spending increases near the end of the business cycle will lead to a recession toward the end of 2019.  In my view, the juiced up economy will cause the Fed to raise rates faster than expected, generating a slowdown as we move into the 2020 election cycle.  However, if the decision to rescind the Iran deal maintains oil prices above $70, higher gasoline prices will take a bite out of the tax cut stimulus.

One way (high interest rates) or another (high gas prices), the US economy is in for a slowdown when 2020 rolls around.  If this is the case, Trump might have a "Jimmy Carter experience."  In 1979, Carter appointed Paul Volcker as Chair of the Fed, and while he initially supported Volcker's policy (higher interest rates) to restrain inflation, realizing the impact would hit during the 1980 election year, he pushed Volcker to reverse policy, too late of course... 

Same as it ever was...

Been a little busy with the new semester and other work, so another quick post just to put my thoughts out there on oil prices this year.  So far, things have played out as I expected. First, there was some re-balancing in supply and demand that started last year, and inventories declined for an extended period.  The problem, and it's the same problem, the Hedgies push prices up hoping this time is for real--meaning they believe the fundamentals have changed, and they push prices into the $60-$70 range hoping they will hold there.  However, their actions create incentives for US shale to expand, and the higher prices stop the re-balancing that's needed to sustain higher prices. Instead, inventories are rising again, and prices have dropped.

For 2018, I see more volatility in prices for precisely the reason outlined above--there will be periods when Hedge Funds think markets are balanced (enough) and they bid up prices, just to have them fall back again.  I think trading will range between the low $50s and the low $70s, but most of the time WTI should trade between $55-$65.  As the US economy accelerates from the tax cuts, that will bring hope and higher prices, only to be dashed again and again...Same as it ever was, same as it ever was...

Financialization of Commodities and the Monetary Transmission Mechanism

Most of my writings on this blog relate to financialization of commodity markets. Specifically, I describe how financial traders now dominate the commodity futures markets and their decisions have the greatest impact on prices. I recently published a paper that ties these ideas to monetary policy and inflation.

I argue that financialization created a more direct influence on commodity prices through an "expectations channel." As a case study, I describe the impact QE2 had on commodity prices and measured inflation via this mechanism. As the FED cranked up QE2, inflationary expectations led investors to bet on oil and other commodities, creating a temporary bubble that popped dramatically the first week of May 2011. However, since the process was driven by investors who may (or may not) learn from their mistakes, it may have been a one-time occurrence.

The paper was published in the International Journal of Political Economy, HERE.