The oil price is where Texas needs it to be, not where it should beWhile the stock and commodity markets were busy correcting five years of ludicrous over-valuation for most of the last six weeks, the 3% were busy telling us that the markets are insane and “none of this is supported by the data”. After another rally got under way for both stocks and oil yesterday – based on flimsy and forlorn hopes respectively – the data clearly didn’t support it….but by Monday evening Goldman Sachs was saying the worst is over, banks are just fine, and things ‘are returning to nomal’. Which probably explains why Miner Anglo-American lost $5.6bn last year, has stock rated as Division IV junk, and is in my estimation no more than four months away from needing a rights issue. And that’s OK too says Goldin Sacks, because ‘the risk for junk has returned now that investors see the fabulous value they represent’.
The futures say the markets will power ahead again today. But apart from one tentative oil-supply ‘deal’ between the Saudis and Russia this morning – and empty bromides from Mario Draghi yesterday – nothing has changed from last week, when the markets were melting down.
‘Qatar oil cuts disappoint’ says Bloomberg as I write. WhatTF else were they going to do? Did the markets expect Putin to fall on his market share for the good of Texas?
It all depends on whether you think yesterday was about ‘the markets’ alone.
The bank valuations have rebounded – why? Oil is back at $35 – why? The banking sector issues are unsolved, and if oil supply is cut, how will that make demand for it go up? While I said last week that there will be rallies long the way, I freely admit to having been surprised by both the size and suddenness of this one yesterday and overnight. On Sunday, I headlined ‘It’s hard to see anything more than more of the same’. Yesterday I wrote, about the latest rally:
‘On this sort of thinking sits the fate of the world economy. And that economy faces a dire future because of the glaring disconnect that continues between the financialised capitalism of monetarist drivel, and the real global slump out there which, without QE being counted as ‘gdp’, would be even more bleedin’ obvious.’
We are still in the Winter of Disconnect, and this is a false Spring. It is a Spring more false than the Arab Spring. So false, in fact, that I’ve been wondering since Monday mid-morning whether person or persons unknown may have been tampering with the weather. But lest this sound like sour grapes, allow me to restore reality with a few thoughts.
- Just one week ago, the International Energy Agency (IEA) had this to say: ‘Having peaked, at a five-year high of 1.6 mb/d in 2015, global oil demand growth is forecast to ease back considerably in 2016, to 1.2 mb/d, pulled down by notable slowdowns in Europe, China and the US. Early elements of the projected slowdown surfaced in Q415.’ Blaming price on supply alone is a con-trick, nothing more: Between Q315 and the current moving daily averages, global demand has fallen from 95.4 to 94.8 to 94.5 million barrels per day.
- At first, the claim used was that ‘refined product inventories are not growing’. But it simply is not true. On December 9th, Washington’s Energy Information Administration (EIA) released data showing that ‘distillate inventories’ jumped by five million barrels – double the expected forecast, and the sharpest rise since 1998. That’s diesel road and factory fuels to you and me: a core measure of how business delivery and output are faring. In a word, badly. Other parts of the EIA report show demand ‘falling an average of 80,000 barrels a day throughout 2015‘.
- The stocks/oil rebound narrative today makes frequent use of ‘stimulation bets’ as a key driver. QE has failed everywhere, Nirp is proving a disaster thus far in Japan, and Draghi’s speech yesterday promised that he “would act”…but not what that action might be. (See last night’s satirical post about that one). Well, eurozone economic growth slowed to a four-month low in January, and the French economy remained close to static. But Mario is not as yet starring in the role of Yul Brynner from The Magnificent Seven. The earliest action we can expect is over three weeks away…and his “promise” to act was heavily qualified:
“First, we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations. This will depend on the size and the persistence of the fall in oil and commodity prices and the incidence of second-round effects on domestic wages and prices.
“Second, in the light of the recent financial turmoil, we will analyze the state of transmission of our monetary impulses by the financial system and in particular by banks.
“If either of these two factors entail downward risks to price stability, we will not hesitate to act.”
In short, more tricks. All mouth, absent trousers. The faux-bull cow-milkers (if you follow) are directionalising for short-term profit. And the oil business needs the price where it is, because an oil business with oil at $25 a barrel can’t survive. Maybe they’re being given an unseen hand from the Fed on that one…it wouldn’t surprise me. Or anyone else for that matter.
But even Texas with a Ten Yellen hat on can’t outgun the world, and the stocks turnaround cannot last. Already this morning, European indexes suggest it’s running out of steam. Sooner rather than later, the ‘deal’ done by Russia and the Saudis in Qatar earlier today will only amplify the growing problem of waning demand.
This is Crash2, Correction3, rally6 signing off. Time to move on to the next stage.