Oil and our economy
06-02-2006, 10:05 PM
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Oil and our economy
Was just browsing and ran into an interesting article about oil and stock prices, thought I would share.
Is Oil Heading Back to Reality?
By Edward Tapamor
02 Jun 2006 at 12:16 PM EDT
LONDON (ResourceInvestor.com) -- If you have been watching the oil markets over the past few years - and here on board the Resource Investor yacht in Monaco we suppose you have been - you will have noted a couple of fundamental changes. Things like Brent costing more than the NYMEX WTI.
But apart from that, one of the major changes has been the way high oil prices have supported equity indexes. That high oil price translated into extra performance from the majors and then has slushed around billions of dollars of liquidity. It did it basically by overwhelming the size of the indexes in terms of company volume.
Giants like Exxon-Mobil [NYSE:XOM] and Chevron [NYSE:CVX] in the U.S., BP [NYSE:BP] and Royal Dutch Shell [NYSE:RDS-B] in Great Britain, Total [NYSE:TOT] in France and Eni [NYSE:E] in Italy support their indexes. Their volume is so huge that any upwards movement in their equity value pulls the markets up.
As retailers and technology shrunk away, their problems compounded by high energy costs, their value was transferred to the majors and their smaller independent counterparts listed on the various exchanges. Every dollar in upwards movements in the oil price supported the value of the companies, that in turn supported the value of the indexes. But that may be changing.
You might expect to see oil falling drastically alongside the equity indexes. You might think the market would already be pricing in a downside for oil and gas, predicated on falling equity markets. But instead we have seen a more normal pattern, energy prices have risen as equities have fallen. Not every day it is true, but most of them.
For a long time the market has talked about a ‘tipping point,’ the point at which energy costs would start to eat away at economic value. Basically it would be the road to recession, energy prices will fall, then we can start the whole damn thing again, just from a higher starting point.
So in May 2006 prices actually averaged over $70, in fact they hit $70.96. This may be restoring some kind of realism (we can’t say sanity, markets are insane) to the whole situation. Will oil prices fall with stocks or will some rather bullish indicators keep the price hot? Because if that is the case we could be in for a very nasty little period. Maybe not now, maybe in a few month’s time but falling equities and sustained high oil prices will not be good news for the global economy.
You see, U.S. oil demand rose 1.9% in March with gasoline rising by 1.5%. In a country with no proper public transport people really are addicted to oil, sad though it is to agree with President Bush. American builds are slowing and refineries are thirsty. Chinese demand, which remember was held back last year by a government trying not to over stoke its entire economy, has been robust, hitting somewhere in the region of 8%.
As China unwinds its dollar peg, it will reduce subsidies for gasoline at home. As it reduces subsidies for gasoline at home all the pent up demand will suck up more crude and more products. Right now Chinese refiners ration whole regions as they have to export so much of what they refine not to cost the country a fortune.
So the overall picture is looking even more volatile than it was before. We could throw in the deterioration of the situation in the south of Iraq as well; remember Basra is a main export terminal for Iraqi crude. We could throw in the attempt by America to box in Iran by offering supposed talks that are in fact a way of getting closer to war. These are not good indicators.
Then finally add in a long-term problem, the fact that a consolidated economic market, a market where more power is in a smaller amount of hands than the last time we had oil shocks, the kick through of energy costs may be much slower to occur. Gasoline costs are fairly instant to the consumer and it is already hurting the poor (they just do not get on the news anymore) but corporations have swallowed the hits.
So if we are seeing the effects of high-forty, low-fifty dollar oil now, what could happen for the rest of the year? Hang on to your boating hats, it could get stormy.
Is Oil Heading Back to Reality?
By Edward Tapamor
02 Jun 2006 at 12:16 PM EDT
LONDON (ResourceInvestor.com) -- If you have been watching the oil markets over the past few years - and here on board the Resource Investor yacht in Monaco we suppose you have been - you will have noted a couple of fundamental changes. Things like Brent costing more than the NYMEX WTI.
But apart from that, one of the major changes has been the way high oil prices have supported equity indexes. That high oil price translated into extra performance from the majors and then has slushed around billions of dollars of liquidity. It did it basically by overwhelming the size of the indexes in terms of company volume.
Giants like Exxon-Mobil [NYSE:XOM] and Chevron [NYSE:CVX] in the U.S., BP [NYSE:BP] and Royal Dutch Shell [NYSE:RDS-B] in Great Britain, Total [NYSE:TOT] in France and Eni [NYSE:E] in Italy support their indexes. Their volume is so huge that any upwards movement in their equity value pulls the markets up.
As retailers and technology shrunk away, their problems compounded by high energy costs, their value was transferred to the majors and their smaller independent counterparts listed on the various exchanges. Every dollar in upwards movements in the oil price supported the value of the companies, that in turn supported the value of the indexes. But that may be changing.
You might expect to see oil falling drastically alongside the equity indexes. You might think the market would already be pricing in a downside for oil and gas, predicated on falling equity markets. But instead we have seen a more normal pattern, energy prices have risen as equities have fallen. Not every day it is true, but most of them.
For a long time the market has talked about a ‘tipping point,’ the point at which energy costs would start to eat away at economic value. Basically it would be the road to recession, energy prices will fall, then we can start the whole damn thing again, just from a higher starting point.
So in May 2006 prices actually averaged over $70, in fact they hit $70.96. This may be restoring some kind of realism (we can’t say sanity, markets are insane) to the whole situation. Will oil prices fall with stocks or will some rather bullish indicators keep the price hot? Because if that is the case we could be in for a very nasty little period. Maybe not now, maybe in a few month’s time but falling equities and sustained high oil prices will not be good news for the global economy.
You see, U.S. oil demand rose 1.9% in March with gasoline rising by 1.5%. In a country with no proper public transport people really are addicted to oil, sad though it is to agree with President Bush. American builds are slowing and refineries are thirsty. Chinese demand, which remember was held back last year by a government trying not to over stoke its entire economy, has been robust, hitting somewhere in the region of 8%.
As China unwinds its dollar peg, it will reduce subsidies for gasoline at home. As it reduces subsidies for gasoline at home all the pent up demand will suck up more crude and more products. Right now Chinese refiners ration whole regions as they have to export so much of what they refine not to cost the country a fortune.
So the overall picture is looking even more volatile than it was before. We could throw in the deterioration of the situation in the south of Iraq as well; remember Basra is a main export terminal for Iraqi crude. We could throw in the attempt by America to box in Iran by offering supposed talks that are in fact a way of getting closer to war. These are not good indicators.
Then finally add in a long-term problem, the fact that a consolidated economic market, a market where more power is in a smaller amount of hands than the last time we had oil shocks, the kick through of energy costs may be much slower to occur. Gasoline costs are fairly instant to the consumer and it is already hurting the poor (they just do not get on the news anymore) but corporations have swallowed the hits.
So if we are seeing the effects of high-forty, low-fifty dollar oil now, what could happen for the rest of the year? Hang on to your boating hats, it could get stormy.
