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Wednesday, June 25, 2008

 

montier and edwards on oil, macro


while i do think the oil market is seeing the effects of a speculative period, i do also think that, as i said earlier:

oil is getting scarcer vis-a-vis demand and cost of production is rising and will continue to rise.


peak oil -- whether it be the geological inevitability or simply increasing producer domestic demand reducing the amount available for trade or both -- is a factor as well.

the federal reserve bank, for their part, would be wrong to confuse either with inflation. and that, via barry ritholtz, is the point of a discussion between james montier and albert edwards. included is some terrific discussion about a developing glut of spot oil:

Albert: ... All I’d add is that from thecommodities side what has surprised me, as I have written, was that when I looked at some of the commodities indices, because I was sort of relating the CRB to world growth, it’s only been in the last six months or so that the CRB has totally detached from the cyclical slowdown we’re seeing and gone potty. And when I actually looked at some of the industrial commodity indices that exclude oil, like the Economist’s industrial baskets, which includes agricultural industrial commodities as well as metals, and the IMF industrial commodity index, they’re actually flat year-on-year, which, to be honest, surprised me. So I dug around a bit more and then found out — because I don’t keep my eye on these things all the time — that actually things like lead, zinc and nickel are down about 50% from their peaks. As always, as James says, people reach for growth, so as these sort of cyclical risk dominoes tumble, they funnel into the remaining stories that haven’t yet been disproved. What is interesting is that this is now very much a food and energy bubble. All the speculation seems to have funneled in, even within the commodity complex, to food and energy, just those few commodities. Obviously they are key commodities. But the oil price — before I left London to come out here I read through a stack of newspapers from this week, and saw an interesting article in the Wall Street Journal saying that actually there is a glut of spot oil. Some Gulf states are hiring tankers to basically park their surplus oil in the Gulf, because they can’t find buyers for it.

Right. There’s reportedly an immense amount of inventory afloat in the Gulf.

Albert: And the demand isn’t there for it at the spot end. As James always says, pricing commodities, unlike equities or bonds, is very difficult. You might agree with the structural argument, but where does that mean that the price of oil should be? Should it be at 200? 400? 60? It actually doesn’t tell you where oil should be. Certainly nothing has changed structurally in the last six months. Oil has rocketed up, yet the only cyclical phenomena which has changed is that the IMF forecast for global demand this year has absolutely plummeted. The IEA has cut their forecast for oil demand again and again and again, compared to where they were at the beginning of this year, and yet the price has totally detached itself from those fundamentals. So for me it is clearly a speculative phenomenon. I mean, you had the Goldman oil guy coming out saying “buy,” forecasting $200 on the long-dated contracts. Lo and behold, they jumped $10-$15 because everyone piled in. But I don’t see it. What people forget is that there is always a structural argument. They said in the U.K. that house prices could not fall because there is a shortage of land and we are having all this immigration. Lo and behold, cyclically house prices have just collapsed in the U.K. But the structural argument hasn’t changed. I see the situations in oil and food as similar. I am a structural bull on commodities. But hey, I see the cycle turning, and I think, “No, this has just gone a bit potty.”

It’s silly season. I saw a headline this morning saying that the IEA is about to slash its forecasts of peak production capacities —

Albert: Sure, that’s a methodology change, just like Moody’s has to keep doing. On the way up, methodologies are changed to justify higher prices. When we’re back at $60, and given a global recession, we will be back at $50 or $60 in a year’s time, they’ll be changing the methodology back again.


montier and edwards are forecasting the end of the oil bubble and a steep decline in emerging markets shares in the next six to twelve months. and that of course is not independent from their views of the american economy.

UPDATE: in passing, this morning's ft markets live cited albert edwards' forecast note:

PM:
But before he runs off with the story we’ve got, id like to make two observations.
PM:
1. The FTSE100 is WAY down. Off 75 points currently.
PM:
2. Albert Edwards is predicting the end of the world as we know it.
NH:
That’s not news!
PM:
Ah, but this is. Look at the severity of this prediction:
PM:
A deep recession will result in a profits slump. Coupled with an Ice Age P/E contraction, we see global equity markets falling some 70% from their Oct 07 peak. I expect the S&P to bottom around 500 (verses the 1,575 peak) and FTSE around 3,000 (imagine where consumer confidence will be if equity prices do collapse).

NH:
wow
PM:
Got that.!?
PM:
Tin hat warning or what!?!?!!?
NH:
S&P at 500
NH:
sure that’s not typo and he means the S&P 500?
PM:
Nope –
PM:
70% fall forecast
PM:
And remember Edwards is the top rated strategist in Europe
NH:
he is


looks as though edwards believes his worst-case scenario is in fact unfolding.

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