Global financial markets still not fully discounting oil price risk
Posted on 05 March 2011 with 4 comments from readers
Global financial markets are still infatuated with the very weak US economic recovery and failing to see the new 600-pound gorilla in the front room: political unrest and civil war in the Middle East and North Africa.
Professor Niall Ferguson is right to point out this week that a smooth transition to democracy like that seen in Eastern Europe is by far the least likely scenario. Military regimes, civil war, Islamic rule, and even outright war between states are far more probable, with Israel the obvious flashpoint.
Military rule
Egypt is now under the control of a military junta and Libya deep in civil war. Lebanon is under the control of Islamic Hezbollah. And political and social unrest erupted in Oman this week and continues in Bahrain where there have been violent clashes between Shia and Sunni Muslims for the first time.
Unconfirmed reports suggest protests have already occurred in the Eastern Provinces of Saudi Arabia where the first of two days of protests is slated for March 11th and the second on the 20th. Two days to watch in the month ahead.
If financial markets are supposed to efficiently discount future events into commodity prices they do not seem to have gotten oil right just yet. Hedge fund operators like T. Boone Pickens see this as an opportunity.
For the supply and demand side of oil was already pointing to much higher prices before the current crisis erupted in the MENA region. That might not be fully appreciated either. But this new crisis is a ‘new normal’, and that is what the market has not yet fully taken onboard. There is no quick and easy end scenario.
Outside of the ‘new normal’ of MENA politics the oil supply position has been a mounting concern for ages. There simply is not much expansion of capacity going on in the world, or certainly not relative to spiraling demand from places like India and China.
Gas guzzlers
Now that the Chinese are buying more cars each year than the US they are naturally going to use more and more gas for those cars. Eventually as in the 70s rising fuel prices will choke off that demand, or reduce it significantly but how long will that take, and how high will oil prices be by then? $200? $300?
It is therefore somewhat ironic that the stock markets of the oil producing Gulf States are the ones fully discounting the impact of the new crisis – with Dubai stocks at a seven-year low – while equities in the rest of the world are close to post last crisis highs.
You can only wonder where global equities will go when high oil prices are fully discounted, and interest rates go up to counter the inevitable inflation that comes with high oil prices. Its also not good news for bonds or real estate. Perhaps that’s why gold and especially silver prices look so strong.
4 Comments posted by readers:
I picked up some USO calls and for those that have not been following the calls for USO check out the April $45 calls calls for USO.
http://www.google.com/finance?q=NYSE:UPRO
For some reason right before close (about the last 1-2 hours or so) the $49 April calls for USO just skyrocketed. Either someone is going to lose a lot of money or someone knows where OIL prices are going this next week month.
The link in the above comment I posted was wrong. This is the proper link for the activity for USO calls before closing on Friday.
http://www.google.com/finance/option_chain?q=NYSE:USO
@ Andy:
I used to trade both puts and calls, up until a few years ago; and it was fun until 2007 or so. I’m sure you know that old saying about the options markets; “80% of the time, those who set the prices of options are right.” But that was in the old days, and the new normal is here.
There’s so much more manipulation from the big banks (who control the commodities markets!), so much more propaganda, and so much dis-information flowing around the commodities pits, that the “little guy” is not able to discern truth from fiction; and the net result of all this is that the old saying doesn’t apply any more.
Through outright manipulation, my guess is the following:
“95% of the time, those who set the prices of options are right.” The big banks make sure that they’re right, by manipulating the futures markets, thereby forcing most of the options to expire out-of-the-money.
In this particular case, however, there’s more “black swans” that could suddenly appear in the MENA region, so hang in there!
the us/uk governments should mandate that every building have solar panels and every backyard a windmill, then when we all start riding bicycles and growing our own food, the chinese will be able to drive their cars and heat their homes with the oil that we can no longer afford.