More on oil prices
Just a short follow-up to my latest post on oil prices:
A commenter advised me to look at the term structure of oil prices. The term structure was really important in the past; it hasn’t been of late, but the shift from backwardation to contango did catch the change of direction in oil prices back in June. There is a small backwardation at the moment. BTW, you can follow Brent and WTI future prices from ICE’s web site. I also noticed that ICE has a useful monthly oil report.
The same commenter also notes that the lack of investment alternatives might be one of the reasons behind the rise in oil prices. He argues that this was the case in 2008, right before the Lehman collapse, when oil prices had hit record levels:
In his own words “If you listen to the news on the European stock markets, everything seems to depend on Greece etc. Perhaps this assessment is overdone, but psychology is as it is. So a bet on oil prices, with energy getting more scarce anyway, still seems to be a better (speculative) investment alternative.” I certainly would not dismiss this alternative.
As for the effect of QE on oil, there is a post in Pragmatic Capitalism blog on the relation between monetary expansion, the dollar and commodity prices that is worth reading. As he notes, many economists believe monetary policy can’t effect commodity prices. If you read my previous post, you’d know your friendly neighborhood economist is not one of them. I think the problem is that in very standard frameworks, there isn’t a relationship between liquidity and globally-traded goods (read: commodities).
As for geopolitical risk, one of the key themes I discuss in my column, the JP Morgan has devoted its latest Commodity Markets Outlook and Strategy entirely to it. One of their key arguments is that the risk of military confrontation is still not very high, but there are other interesting points throughout. Definitely worth a look…
Finally, there is an interview with James Hamilton, which was posted here at Economonitor. to whom I refer to in my column. Among other points, he makes a really good distinction between the short and long run…
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