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Reading The Strange Economics of MidEast Oil




The end of July did not see overall 'strident move forwards,' as June did. The month ended with the first interest rate cut since 2008. Now at 2.25% the interest rate gives no solace to retiring savers, and has already been priced in by the Titans of Wall Street.

Instrument/July 31/June 30/
S&P 500/2980. /2942
DOW/26,864 /26,526
10 y t yield/2.02%/2.01%
Crude/ $57.89/$59.43
Gold/ $1413/1408/

Meanwhile, reading The Strange Economics of MidEast Oil in BusinessWeek. 

The story reminds that judgement rests on certainties, but those certainties bear review. Learning, unlearning, learning, onion layer peeling - these are daily tasks for those that would pursue economic prediction.

People who have lived through various recessions know that oil can play an important role in such events, and that its price can gyrate wildly, effecting psyche and other commodity prices. In my home house I recall, the 1978 oil embargo, the jump in gas prices and a consequent vault in many commodities, marked -- when bread went to $1 a loaf (!) -- by my father gathering all the loose money of the house's inhabitant, going out and buying flour and a breadmaker.

Another example - recalling the pleasure turning to anxiety as gas prices fell during the world financial crisis of 2008 - the price of WTI went from $145 a barrel to $34 in five months.

"Saratoga isn't the graveyard of favorites - it' the graveyard of bad handicappers." - Andy Sterling.

So when you see tankers ablaze in the Persian gulf, and ships being requisitioned  (word?) there, you brace yourself for price hikes, recession or similar. An interesting story in BW makes this same point, and then asks why - in the face of such uncertainty -- the price of oil has gone down 26% from its Oct 2018 highs.

But the price of insurance has risen 1000% in that time - $500,000 a voyage, according to BusinessWeek. Traders and analysts think the falling price with the rising risk is amazing. But the price has been falling.

Why is the picture different this time? A chief factor is surplus. The reemergence of the U.S. as an oil producer has ensured that. Via the technical miracle of fracking, for several years now, the country produces more oil per day than either Saudia Arabia or Russia. There are new fields being found in Canada and elsewhere. OPEC  is cutting output, but there is still a glut. And, unlike in the days of Jimmy Carter and dad's breadmaker, even at low per-barrel prices, the other oil producers are highly incented to keep pumping.

The prospects of worldwide economic slowdown have been bandied about for awhile, not that the stock market has cared.  While doomsday is overdue, the situation is not robust, and that has been a curb on oil consumption, analyst say.

There are as I write this signs of a an inventory drawdown- that holdings may be closer to normal and further from glutful.  An event could upset the new norm. Things like joint maneuvers by the Iranian and Russion navies are not enough to upset a Wall Street Trader on a roll, right? -Baruch Bernard

[UPDATE Aug 1 - ] Through the wonder of time and programmable pixels, this blog can now tell you what happened the next day, and it wont be concern about naval moves in the Persian Gulf. The market was quickly recovering from any downer that might have been baked into the Fed rate drop. Maybe because all is good as long as Trump is hectoring the Fed. Alas, Trump let the dead cat bounce of his moribund trade negotiations out of the bag by announcing by Tweet billions of dollars more in China tariffs. (he wants to move the Fed into a corner some people say.)  The uptick turned into a rout, as the Dow shed almost 600 points after the Tweet. "It's fine with me if China doesnt want to trade with us anymore," said the Son of the Burrough Real Estate Baron turned Leader of the Free World. THe markets then went to figuring finally what does this mean if trade slows down. Crude didnt have to worry about glut, as the world would need less as decline set in, and the biggst one day drop since 2015 occured. Yield on bonds fell under the -2.0 % net. Gold hit a 2-year high.


Instrument/Aug 1/%/July 31/June 30/
S&P 500/0.90%/2953/2980 /2942
DOW/2653/-1.05%/26,864 /26,526
10 y t yield/1.90%/2.02%/2.01%
Crude/ $54.94/-5%/$57.89/$59.43
Gold/ $1435/-0.015%/$1413/1408/





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