Posts Tagged ‘crude oil prices’

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Hamilton on oil prices and the recession

December 2, 2009

Michael Giberson

James Hamilton, “Will rising oil prices derail the recovery?“:

I have no doubt that the problems with financial markets were a bigger factor than oil prices in the striking collapse in output in 2008:Q4 and 2009:Q1. The other approaches to measuring the contribution of oil to the downturn surveyed in my Brookings paper would estimate a smaller contribution of oil to the downturn than suggested by the figure above. On the other hand, all of the approaches surveyed in that paper suggest that oil made a material contribution to the initial downturn, and it seems hard to deny that that the severity of the financial crisis was exacerbated by the fact that the U.S. had spent three quarters in recession prior to the failure of Lehman in September 2008.

Hamilton then considers the concern that rising oil prices will dampen or destroy prospects for economic recovery.

Posted in Economics, Energy markets | Tagged , , | Comments Off

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Calling the next bubble: is there currently a “dollar-led asset bubble”?

October 30, 2009

Michael Giberson

The list of people who agreed, after the fact, that yes there was a {internet company | real estate | … | tulip bulb} price bubble is frequently longer than the list of people who publicly announce a bubble in unequivocal terms in advance of a crash.  But here you have someone willing to stick their neck out:

“It seems quite clear to us that the (Nymex) futures market is currently part of an dollar-led asset bubble,” said Olivier Jakob of Petromatrix in Switzerland.

FT Energy Source provides some context from Jakob:

Remember the days when hurricanes and geo-political events made oil fly?

Well, according to Olivier Jakob at Petromatrix, those days — for the time being at least — should be forgotten. The correlations between the Dow, the dollar and oil are now so well set, traders simply can’t afford to ignore them.

FT Energy Source quotes from an unnamed source document (but Petromatrix produces subscriber-only reports and I assume it is from one of these; emphasis added by FT):

WTI is still not able to break away from its pure correlation to the exogenous markets of Dollar and Equities. For the last two days WTI and the Dow Futures have run an R square of 0.9 on the intraday 10 minutes and at such ratio it is just possible to beat the theme of purely trading the Dow on oil futures.

I’m not sure I’d stake too much on a two-day regression correlation.  More:

It does not make sense per se but that is the way it is and not trading that theme would only be a proposition to provide liquidity to those who are. The problem remains that the real economy works on different principles than computer games and the current asset correlation would not allow an economy recovery to materialize. At current correlations the Dow at 11′000 would translate in WTI at 100 $/bbl which will hurt consumer confidence and demand and cap the recovery.

Here we extrapolate out from our two-day correlation up to a 11,000 point Dow – a level we haven’t seen for a year and may not see for a while longer.  I’m no statistical genius, but we seem to be forecasting pretty far out of sample.  Analytically, it makes me nervous.

The bubble statement comes next:

It seems quite clear to us that the WTI futures market is currently part of a dollar-led asset bubble and irrespective of the oil fundamentals the next input that will be decisive in the direction of oil prices will be the Fed meeting of next week (November 3rd and 4th ). No action is currently expected from the Fed, but it must be also realizing the across asset bubble in formation and at one stage it will have to decide if it wants to start deflating it or letting it run at the risk of having a burst that it can not handle later on.

It isn’t quite clear to me whether the the dollar-led asset bubble conclusion hangs on any evidence more substantial that the two-day price correlation.  Color me unpersuaded (unless it turns out to be true, of course, in which case I will claim to be among the cognoscenti from the beginning on this whole new dollar-led asset bubble thing).

N.B.: I’m not disputing the value of the larger analysis from which these quotes were ripped by FT Energy Source, which I haven’t seen, just gently poking fun at the idea of trading oil futures based on two-day correlations in prices.  Since I am not a trader and not familiar with real-world trading analytics, it may be that I’m entirely off base and two-days worth of 10-minute data is great empirical stuff.

Posted in Economics, Energy markets | Tagged , , , | 1 Comment »

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Geoff Styles on the CFTC’s desire to fix up energy futures markets

July 8, 2009

Michael Giberson

Geoff Styles: Speculation Witch Hunt?

He says he thinks “the CFTC and its supporters in Congress and the administration are barking up the wrong tree, altogether, based on a fundamental misunderstanding of the markets.”

the current determination to clamp down on speculation appears to be based on two hypotheses that are … probably entirely false: First, that in the absence of speculation, oil prices would not have spiked to nearly the degree they did last year and would be much lower today than they are, and second, that a market without speculators–or indeed without any futures trading at all–would be inherently less volatile than one in which those factors are present.

The latter point is easier to dispose of, Styles suggests, but both points are relevant to the current political concerns. He elaborates on both issues.

UPDATE: Here is Craig Pirrong on the same topic, “Now I know how Sisyphus felt.”

Posted in Economics, Energy markets | Tagged , | Comments Off

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Oil shocker: Energy economist bids to get back on the front page

April 22, 2009

Michael Giberson

I don’t know about the rest of you university energy economists, but life in the classroom got a little tougher for me this Spring. Last Fall energy economics was on the front pages of the nation’s newspapers every week, nearly every day. Anytime I wandered into class a minute or two early, I could strike up a casual conversation with the gathering students over “energy in the news.” It offered me a relaxed, but frequently spot-on topical approach to initiating class discussions on oil and gas markets and alternative energy. Students saw immediate, external validation of the importance of issues we were going to be discussing in class that very day. Energy was hot, hot, hot.

Not this Spring. Banking and finance and the Federal Reserve are all over the headlines, and much more modest energy news is relegated to the inside pages.

So on behalf of all teaching energy economists who found themselves in this situation, I’m offering thanks to James Hamilton of UCSD for his brave bid to get economics back into the news. Hamilton has put together an analysis pointing to 2008′s oil price shocks as a sufficient explanation for the economy’s turn to recession. If Hamilton is right, it wasn’t AIG or Lehman or the real estate bubble or any of that stuff that has been monopolizing the front pages all semester. Or, at most, those were just dominoes, while oil prices were the prime mover.

All Hamilton has done is assembled some evidence that supports this viewpoint; he warns it is suggestive, not conclusive. Still, it is an interesting hypothesis, one worth additional exploration and perhaps even worthy of a front-page story in the newspaper, or two.

And it isn’t just “interesting,” it is potentially very important. If Hamilton is right, then the policy responses coming out of Congress and the current administration may be wildly off track.

(HT to Derek Thompson at The Atlantic Business blog and Keith Johnson at WSJ’s Environmental Capital. Hamilton’s paper, Causes and Consequences of the Oil Shock of 2007-08, was recently presented at the Brookings Institution.)

Posted in Economic history, Economics, Energy markets | Tagged , , | Comments Off

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Why are gasoline prices so high? (February 2009 version).

February 16, 2009

Michael Giberson

So low, and yet so high.

It seems to be the way consumers feel about gasoline prices these days.  Yes, prices are down compared to a year ago, but everyone knows that crude oil prices have been going down lately while gasoline prices are up from their December 2008 lows.

From The Mercury News:

Crude oil is selling for the low price of under $35 a barrel. The precious black commodity is awash at storage tanks across the country. And drivers from New York to the Bay Area are motoring less and less as the economy continues to sink.

But the price of gas is going up and up and up — to $2.29 a gallon in California on Saturday, 25 cents higher than a month ago and 49 cents more than before Christmas.

What gives?

The Mercury News cites a number of factors, including maintenance work at refiners, mechanical glitches, and “the gradual conversion to summer blends of fuel” as among the factors. Also, the News said, much of the crude oil made into gasoline comes from South America or the Middle East, and prices there are about $10 bbl higher than the benchmark West Texas Intermediate (WTI) price most frequently cited in the (U.S.) press.

The Associated Press recently ran a story on the same theme, “If price of crude oil is dropping, why is cost of gas rising?“:

Crude oil prices have fallen to new lows for this year. So you’d think gas prices would sink right along with them.

Not so.

On Thursday, for example, crude oil closed just under $34 a barrel, its lowest point for 2009. But the national average price of a gallon of gas rose to $1.95 on the same day, its peak for the year. On Friday gas went a penny higher.

The AP story clarifies further the role that higher priced crudes from elsewhere play in this particular story:

The recession in America has dramatically cut demand for crude oil, and inventories are piling up. So prices for West Texas crude have fallen well below what oil costs from places like the North Sea, Saudi Arabia and South America.

That foreign oil sells in some cases for $10 more per barrel — and that doesn’t even include shipping.

Brent North Sea crude, which feeds some East Coast refineries — and therefore winds up at many gas pumps around America — now costs about $7 more per barrel than the West Texas crude. Deutsche Bank analysts say the trend should continue.

The WTI price normally trades at a premium to other grades, but a host of temporary factors have driven down the price of the WTI benchmark relative to other crudes. So the crude oil price cited most often in the press may not be the price paid for the crude oil that went into gasoline.

So long as crude oil prices stayed in their usual relationship, it didn’t matter much that the crude oil that went into west coast gasoline was from different places than the crude oil going into Gulf Coast gasoline or that reaching east coast refineries.  Refinery utilization is down, too, and other short term factors are in play (see the Styles and Rapier remarks cited below for more.) Over time these differences will tend to sort themselves out, and the normal relationship will return.  In the meantime, crude oil prices and gasoline prices will continue to look disconnected.

See also, Geoff Styles in The Other Stimulus, and Robert Rapier, Why Gas Prices are Rising Again.

Posted in Energy markets | Tagged , , | 2 Comments »

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