Foreword
RISING OIL PRICES are beginning to threaten prospects for recovery and stronger growth. Although recent rises are largely due to improving economic sentiment and tight supply, the Iran premium is put at anywhere between $20–40/bbl for Brent crude.
Oil prices therefore look vulnerable to the upside. This means that headline inflation may not decline as quickly as some expect. Now at their highest levels since 2008 (in dollar terms) oil prices have set new real records in struggling Europe. Erste Group analysts believe the oil price will hit new all time-highs in H1 to average $123/bbl this year.
Even though Iran could probably only
maintain a blockade of the Straits of Hormuz for a very limited time, the consequences would still be dramatic – with oil hitting $200/ bbl or more. We investigate these probabilities here (see page 32).
Others take a more sanguine view of the
impact that the recent rises might have on the prospects for the global economy. Julian Jessop, Chief Global Economist at Capital Economics expects prices to drop back sharply over the rest of the year as the additional Iran premium diminishes [a conflict avoided]. Moreover, the prospects for inflation are tempered by lower prices elsewhere in the complex, notably agriculturals and gas.
The US economy continues its gradual
recovery, European ‘tail risks’ have decreased, and China has taken steps to ease monetary policy. However, there are plenty of reasons to expect the global recovery to disappoint.
The insoluble problem of Greece will not go
way. Would it not be better just to let Greece default and exit from the eurozone? That probability is put at 50% by Willem Buiter, Chief Economist at Citi. And several other forces could further undermine growth. Fiscal consolidation continues, households are deleveraging and worsening employment prospects in the OECD will continue. The number of jobless in Europe has reached a record high since the launch of the euro at 23 million (10.4%) And the US housing market is hardly showing any real signs of recovery.
Sentiment towards the commodity market
has improved, with investors returning to commodity investments according to Barclays Capital. After cutting their exposure to the complex last year as part of a general desire to reduce risk, investors plan to significantly increase their commodity investments this year (see page 4).
The US recovery, a resolution of the eurozone
crisis and China’s soft landing, mean that substantial further money supply increases are unlikely, we are told. If monetary stimulus is ending, expect commodity price swings to diverge even more, with supply and demand fundamentals in each market exerting a stronger role. This will mean correlations (between and within commodity groups) breaking down.
Consequently, investors should be looking
for more active management of their money, with a shift back to a fuller consideration of the supply side after a year dominated by demand-side concerns and macro fears. However, a real conflict with Iran and a Greek default would reignite those macro fears sending all commodities lower (barring oil and gold). So commodity prices are set for a bumpy ride again (and as ever). We investigate in the pages that follow.
As an aside, there is also a structural shift
taking place in the commodity sector which could have serious repercussions. Not content with inflicting a barrage of new regulations and reporting requirements on markets, legislators are now looking at stripping banks of their physical commodity assets. This less well known phenomenon will come to a head soon. If the banks are required to divest of these assets – warehouses, storage tanks and the like – such a move would be predicated on allegations that they use them to drive prices higher (or lower) to secure trading profits. We have no empirical evidence of this – no one does – so we will investigate in our next edition. •
Guy Isherwood, Publisher/Editor.
March 2012
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