On Monday, the Kingdom of Saudi Arabia received a visit from UK foreign secretary Jeremy Hunt, reminding them they were still on the hook for the murder of Jamal Khashoggi; he also suggested it was time to end the war in Yemen. Whether as a gesture of goodwill, or in retaliation, Saudi energy minister Khalid al-Falih announced a 500,000 barrel per day cut in production – after the collapse in wholesale prices over the past six weeks, partly because of lighter sanctions on Iran exports.
On Tuesday, in an interview with CNBC TV, Malaysian prime minister Mahathir Mohamad said, "OPEC is not effective. They are always at loggerheads with each other so they cannot make a decision. What is more important is the production of shale oil from America."
He also noted that Goldman Sachs had "cheated" Malaysia over the 1Malaysia Development Berhad (1MDB) scandal and that he doubted Donald Trump would be re-elected in 2020. As a small oil-producing nation they will be attending OPEC’s 175th Ordinary Meeting in Vienna on 6 December.
Hyperventilating media on higher oil prices, and subsequent back pedalling, is unnecessary as observed volatility, at 11 per cent, is over one standard deviation below the very long-term mean regression. What is perhaps more interesting, though, is that the chart of Nymex crude oil hints that a new interim high is in place at $76.90, that moves above $73.00 will be very difficult to sustain, and that over the next few months a drop to $45.00 is likely. This would run along the lines of our long-term forecast at the start of this year.
For US consumers, who are highly sensitive to the price of unleaded gasoline, the recent fall is good news. Once again, the market has been capped at just over $2.00 per gallon, a psychological point dear to their hearts. It also brings futures back down to their long-term equilibrium, with rallies above $2.50 and the record high at $2.98 the exception. Expect a slow drift to $1.30-$1.40.
What is very interesting is that the Baltic index of dirty tanker freight rates – a blend of 12 benchmark routes – is today trading close to its most expensive in a decade at over $1,000 per day. Good news for the ship owners, and if demand holds up thanks to cheaper prices, then we might break out of the $500 to $1,250 straightjacket we’ve been in for too long.
Looking at the nominal price of energy products, which are internationally priced in US dollars, doesn’t really tell you whether they’re cheap or dear. A way of getting around this with commodity prices is to look at spreads and ratios. Europe’s Brent blend crude is currently trading at a $10 premium to West Texas Intermediary – very expensive by historical standards, where until the great financial crisis it tended to hold at a $1.00 discount. Mind you, it did get particularly silly in 2011 when it briefly traded $27 over its US counterpart.
With crude oil and gold heavily weighted in the Thomson Reuters commodity CRB index, and history going back to 1957, the ratio between these two (barrels of oil an ounce of gold will buy) is used by market professionals. Recently we have rallied from 16, which is incidentally the mean regression between these two for the last 35 years. Not cheap, and not dear.
