Tuesday 18 September 2012

Oil Price Quandry

As much as with my long, high risk, equity positions I am keen for global markets to continue their advances, there is the odd risk factor at play. Economically, the only game in town is oil price. The price of oil has accurately predicted every recession of the post war, even in 2008 there was the massive spike up to $147 preceeding the Great Crash.

The driver of oil price rises (and falls after a sharp fall yesterday remains unexplained) is more of a mystery. In a time fo falling demand across the world, in US, China and Europe, one would not expect a run up in prices. Of course, this is driven by political and macro factors too. Israel faces a choice of striking Iran soon or learning to live with a nuclear armed terror state. A strike on Iran and the price of oil will shoot north of $200 a barrell for sure on a gigantic spike.

Plus there is huge volumes of speculative trading, the more monetary stimulus is pumped into the world, the higher the price of commodities will go. No doubt oil is being affected by this. However the lasting condundrum of this point is that more QE is really becoming self-defeating. As prices rise and inflation is created by the devaulation of fiat currencies, then the consumers of the world have less money to spend, feel poorer and so reduce their demand further - financial repression sets in, even with liquidity at high levels.

Many people suggest watching the gold price to see the true effects of QE; I demur, the price of oil, the driver of all human activity on a global scale, is the key price to monitor.


Steven_L said...

Hadn't the Brent index been affected by some issues in the North Sea? Everyone up here in Aberdeen was talking about something or other and offshore workers not being able to go out a few weeks back.

Can't remember what the issue was exactly.

Nick Drew said...

Dick is right, the man on the Canton Omnibus is busily burning Jap cars, sushi bars etc etc as we speak

all very unnerving

(not that the BBC seems to have noticed ...)

BrianSJ said...

So the Great Mogambo Guru has been right all along.

JMR brian

Anonymous said...

Careful. Two types of QE here. US QE is very different from UK QE. UK QE is mostly being used to moetise debt - since it replaces money that would otherwise be dissappearing due to deleveraging then it is broadly neutral in terms of money supply. But oil price is determined by the mighty $ - and the Fed is injecting more $ to stimulate growth, not so much to right off the US government debt which is out of control. Thus money supply in the US is growing at a furious rate - very dangerous and leading to higher oil prices.

With the EU and the US behaving in irrational ways, the BofE looks to be the only game in town. Give it 10 more years of misguided US and EU monetary policy and it will be the end of the line for these big trading blocks. Maybe the UK will end up running the show, and the post-war period will end up looking like a minor blip in UK domination of world affairs. With the population growing at quite a lick we will in any case outstrip Germany by 2035 both in population and GDP.

CityUnslicker said...

Anon - that is a hilarious fantasy, well. you ahev channelled Mervyn perfectly.