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.

Evaluating my 2017 forecast

It's been awhile--I had an overwhelming semester...

There are a few articles I came across over the past two months that I want to address at some point in the next few weeks, but for now I simply wanted to review my 2017 oil price forecast.

I started the year off with a fairly conservative range of $30 to $70 for WTI oil, but as I gained more confidence in my overall assessment of the market, I tightened that range to $40 to $60 in this February 15th post.  WTI hit a low of $43 in late June, and a high of $59 November 24th.  I think it's safe to say I nailed it. 

Within the next month I will provide my forecast for 2018.  I do think there is a solid floor in the low $50 range, but more on that later.

Cowabunga and Happy Holidays!

The Political Economy of Food & Finance

It's been awhile...

Just a quick note to say my book is now available in paperback HERE.

Just to add, while it may seem that "it's the end of the world as we know it..." given hurricanes and political turmoil, WTI remains close to $50, and should stay in this range for the remainder of the year.  I will provide a more detailed update in the near future.

A quick note related to the Fire post....

I just came across this Bloomberg piece, Five Charts That Explain Crude Oil's Sudden Nosedive Toward $45, which provides some charts and data on last week's oil market panic.  The charts include a look at technical analysis, showing that WTI broke through some low measures which would cause technical traders to sell; action in the options market focused on puts with strike prices of $45 and $46; and a change in the forward price structure from contango to backwardation, which they suggests shows a move from bullish to bearish sentiment.  

It should be another interesting week. Will prices break lower, or will OPEC and Wall Street be able to defend the current low?

"Fire!"

Someone screamed "Fire!" in the oil theater, and the Hedge Funds headed for the exits.

As predicted, the weight of "pork oil" finally broke the back of Hedge Fund long bets, and some big players were forced to go defensive over the past couple of weeks. According to this piece from SeekingAlpha, Pierre Andurand liquidated much of his long oil position last week, with others followed suit, citing "stop loss" triggers and "risk management requirements." The article states that Andurand's fund is down 15.4% for the year.

As I've mentioned, Hedge Fund long bets in futures peaked at the end of February, and they were slowly declining for the past two months, but the trickle became a flood over the past two weeks. According to this Ft.com article, Managed Money positions fell by 26% the week prior to Tuesday (that's when Andurand closed his position). That scramble continued the rest of the week, leading to volatile price swings; for example, WTI experienced price moves in a 7% range yesterday.

Here's how dramatic the sentiment has changed: according to this Bloomberg.com article, some trader(s?) made a serious bet(s) yesterday (Friday 5/5) that WTI will drop below $40, as 14,000 July puts @$39 were sold, almost 20 times the number of contracts previously outstanding! The price of the option was somewhere between 15 and 20 cents per contract, so that amounts to almost a $3 million wager.

Will it pay off...?  I'll stick with my call here that WTI will stay above $40, as both OPEC and Wall Street banks will try to prevent that from happening. In addition, if the price does approach $40, it will most likely cause the bulls to jump back in, especially since inventories have declined over the past two weeks. Note, that doesn't mean the huge wager won't pay off, as the option premium will increase in value if the price does fall lower.

Now, I could be wrong on that price floor, and the condition for a price collapse is the unraveling of OPEC, which is certainly a possibility given every country's need for oil revenues.  Interesting times...