FreeTrader Posted February 17, 2012 Share Posted February 17, 2012 Brent crude traded above $120 this morning (it's since fallen back slightly), and with sterling trading at 1.584 to the dollar, when priced in sterling Brent is almost £76/bbl. The peak closing price of £77.45/bbl was hit on 8th April last year. At that time Brent reached $126.90/bbl but sterling was trading higher, at 1.639. A drop in sterling to $1.545 or a rise in Brent to $123 will see the nominal closing record broken. The problem here is one of persistence – is this just a temporary blip, or will this price level be sustained for some time or go even higher? After the peak in April 2011, Brent sterling fell back quite quickly and in May was below £70 once more. By August it was below £65 for a period. If the current price persists then by the summer we'll have oil trading 10%-20% above last year, and this will have serious repercussions for the UK economy. On the one hand we may see other prices rise as a reflection of increased input costs, in which case the MPC will once again be left with egg on its face as CPI inflation rises above its predictions (although as before it will wave away the increase as "unexpected exogenous factors beyond its control"). If on the other hand firms try to absorb higher energy costs without increasing output prices then the profit squeeze will likely result in reduced investment and the shedding of many jobs. As any committed peak oiler will tell you, declining conventional oil production doesn't necessarily lead to price spikes up to $200 or $300/bbl. Instead as the oil price rises it sends economies into recession, reducing demand for oil and easing the upward price pressure. Additionally the higher price level makes previously uneconomic oil extraction viable, and this brings in new supply albeit at a much higher producer price. The recession-hit economies begin to recover, but then a further decline in conventional crude production pushes the oil price up again and we start all over. Irrespective of whether the above scenario has any merit, it's predictable what the response of the Bank of England will be should higher oil prices threaten once more to delay the supposed imminent 'return to normal' economic activity – they will simply print more money to "sustain demand". This in turn might well lower the value of sterling against the dollar - resulting in an even higher oil price. Meanwhile high crude prices have left petrol and diesel prices close to a nominal record as well. Diesel may well show a new high when the DECC releases its weekly fuel price data on Tuesday (current high is 143.06 and on Wednesday according to petrolprices.com the UK average was 142.99), and petrol is at present some 1.7p/ltr below the record of 137.05 set in May 2011. Previous post on this subject: http://www.housepricecrash.co.uk/forum/index.php?showtopic=167298&view=findpost&p=3071263 Quote Link to comment Share on other sites More sharing options...
desertorchid Posted February 17, 2012 Share Posted February 17, 2012 Brent crude traded above $120 this morning (it's since fallen back slightly), and with sterling trading at 1.584 to the dollar, when priced in sterling Brent is almost £76/bbl. The peak closing price of £77.45/bbl was hit on 8th April last year. At that time Brent reached $126.90/bbl but sterling was trading higher, at 1.639. A drop in sterling to $1.545 or a rise in Brent to $123 will see the nominal closing record broken. The problem here is one of persistence – is this just a temporary blip, or will this price level be sustained for some time or go even higher? After the peak in April 2011, Brent sterling fell back quite quickly and in May was below £70 once more. By August it was below £65 for a period. If the current price persists then by the summer we'll have oil trading 10%-20% above last year, and this will have serious repercussions for the UK economy. On the one hand we may see other prices rise as a reflection of increased input costs, in which case the MPC will once again be left with egg on its face as CPI inflation rises above its predictions (although as before it will wave away the increase as "unexpected exogenous factors beyond its control"). If on the other hand firms try to absorb higher energy costs without increasing output prices then the profit squeeze will likely result in reduced investment and the shedding of many jobs. As any committed peak oiler will tell you, declining conventional oil production doesn't necessarily lead to price spikes up to $200 or $300/bbl. Instead as the oil price rises it sends economies into recession, reducing demand for oil and easing the upward price pressure. Additionally the higher price level makes previously uneconomic oil extraction viable, and this brings in new supply albeit at a much higher producer price. The recession-hit economies begin to recover, but then a further decline in conventional crude production pushes the oil price up again and we start all over. Irrespective of whether the above scenario has any merit, it's predictable what the response of the Bank of England will be should higher oil prices threaten once more to delay the supposed imminent 'return to normal' economic activity – they will simply print more money to "sustain demand". This in turn might well lower the value of sterling against the dollar - resulting in an even higher oil price. Meanwhile high crude prices have left petrol and diesel prices close to a nominal record as well. Diesel may well show a new high when the DECC releases its weekly fuel price data on Tuesday (current high is 143.06 and on Wednesday according to petrolprices.com the UK average was 142.99), and petrol is at present some 1.7p/ltr below the record of 137.05 set in May 2011. Previous post on this subject: http://www.housepricecrash.co.uk/forum/index.php?showtopic=167298&view=findpost&p=3071263 Interesting post. This is the Achilles heel of QE. Each round has diminishing returns and only services higher oil /commodity prices. Therefore any growth which may arise from increased liquidity and credit availability is immediately squeezed out by higher oil prices and costs of production. The ultimate classical economist response to the futility of such programmes. Quote Link to comment Share on other sites More sharing options...
Pent Up Posted February 17, 2012 Share Posted February 17, 2012 Excellent news! QE is working. All the crude oil owners now feel richer and will get out and revive the ailing economy... Seriously, how on earth is King, Posen and the like still in a job? It's criminal! Quote Link to comment Share on other sites More sharing options...
R K Posted February 17, 2012 Share Posted February 17, 2012 (edited) Striking similarity to the 76-80 gold bubble which had a massive sell off in late 76, prior to the final blow off top in Jan '80. Just over 3 years. Oil has that massive collapse into late '08, followed by X3 over the following 3 years. With an average bubble duration of 3.5 years it would be consistent with a blow off top into the summer followed by a long secular collapse (20 years or so). Ditto gold of course. Edited February 17, 2012 by Red Knight Quote Link to comment Share on other sites More sharing options...
desertorchid Posted February 17, 2012 Share Posted February 17, 2012 Striking similarity to the 76-80 gold bubble which had a massive sell off in late 76, prior to the final blow off top in Jan '80. Just over 3 years. Oil has that massive collapse into late '08, followed by X3 over the following 3 years. With an average bubble duration of 3.5 years it would be consistent with a blow off top into the summer followed by a long secular collapse (20 years or so). Ditto gold of course. Except unlike gold a parabolic move in oil prices would destroy Western economies. How will the FED's 2014 interest rate 'guarantee' look if the price rises aggressively from here. Central banks ARE the problem! Quote Link to comment Share on other sites More sharing options...
R K Posted February 17, 2012 Share Posted February 17, 2012 Except unlike gold a parabolic move in oil prices would destroy Western economies. How will the FED's 2014 interest rate 'guarantee' look if the price rises aggressively from here. Central banks ARE the problem! We know what happens. It happened in summer '08. Recession/depression, banks collapse, chaotic forced deleveraging, QE due to zero bound etc etc. At the time it appeared that '08 was the oil bubble blow off top, but it is starting to look plausible that it was the penultimate top (ditto gold as it happens) and we're now into the final blow off. At some point this will likely end via demand destruction or US rapidly replacing ME oil imports or whatever. We'll either then get the historically usual secular bear commods markets for 17-20 years or else we'll get Grantham's 'new paradigm' of resource depletion meeting increasing demand for the remainder of our lives. Quote Link to comment Share on other sites More sharing options...
Traktion Posted February 17, 2012 Share Posted February 17, 2012 I thought Mervyn King said that fuel prices were coming down, which will relieve inflation pressure? Quote Link to comment Share on other sites More sharing options...
Traktion Posted February 17, 2012 Share Posted February 17, 2012 Excellent news! QE is working. All the crude oil owners now feel richer and will get out and revive the ailing economy... Seriously, how on earth is King, Posen and the like still in a job? It's criminal! Yup, it's pushing up those asset prices, just as they hoped! Not only do we have high house prices, but we also have high everything else prices too! Woohoo! Aren't more expensive things wonderful!? Quote Link to comment Share on other sites More sharing options...
Pent Up Posted February 17, 2012 Share Posted February 17, 2012 Yup, it's pushing up those asset prices, just as they hoped! Not only do we have high house prices, but we also have high everything else prices too! Woohoo! Aren't more expensive things wonderful!? I feel richer already! Quote Link to comment Share on other sites More sharing options...
19 year mortgage 8itch Posted February 17, 2012 Share Posted February 17, 2012 Yup, it's pushing up those asset prices, just as they hoped! Not only do we have high house prices, but we also have high everything else prices too! Woohoo! Aren't more expensive things wonderful!? Can you put in a request to push up my wages too? Quote Link to comment Share on other sites More sharing options...
fluffy666 Posted February 17, 2012 Share Posted February 17, 2012 Can you put in a request to push up my wages too? Look here sonny, it's OK to have explosive commodity price inflation, wildly expensive housing, an executive managerial class who pay themselves like they actually created something and half the population living on benefits, but if we starting giving the proles pay rises it'll be the end of the world. See? Good. If you have any questions, we advise you to watch the X factor on continuous loop for the next 24 hours with your eyelids wired open. That'll answer them. Quote Link to comment Share on other sites More sharing options...
zugzwang Posted February 17, 2012 Share Posted February 17, 2012 This is why QE is at best only a temporary deflation-halting mechanism. By the time it generates sufficient 'animal spirits' in the broader economy to make a difference it's lit a torch under commodities which promptly snuffs any recovery right out. Quote Link to comment Share on other sites More sharing options...
interestrateripoff Posted February 17, 2012 Share Posted February 17, 2012 High petrol prices to cause a recession better print some more QE funny money to stop the recession. Quote Link to comment Share on other sites More sharing options...
R K Posted February 17, 2012 Share Posted February 17, 2012 This is why QE is at best only a temporary deflation-halting mechanism. By the time it generates sufficient 'animal spirits' in the broader economy to make a difference it's lit a torch under commodities which promptly snuffs any recovery right out. To be fair (!) to King and Bernanke both have made your first point repeatedly. The politicians (so far) don't appear to be listening or if they are listening don't know what to do about it. G20 has completely fallen apart and as we're seeing with Germany (and Holland, Finland etc) the creditor nations are in total denial, Schauble-style. The politicians' window of opportunity is rapidly closing. Quote Link to comment Share on other sites More sharing options...
zugzwang Posted February 17, 2012 Share Posted February 17, 2012 To be fair (!) to King and Bernanke both have made your first point repeatedly. Why be fair to that pair of bar stewards, they've never been fair to me! :angry: Quote Link to comment Share on other sites More sharing options...
newbonic Posted February 17, 2012 Share Posted February 17, 2012 Striking similarity to the 76-80 gold bubble which had a massive sell off in late 76, prior to the final blow off top in Jan '80. Just over 3 years. Oil has that massive collapse into late '08, followed by X3 over the following 3 years. With an average bubble duration of 3.5 years it would be consistent with a blow off top into the summer followed by a long secular collapse (20 years or so). Ditto gold of course. A very false comparison (gold/oil). The value of gold is almost 100% sentiment driven. The value of oil is driven by the fact that it is by far the most important energy source for the World's transport system (cars, trucks, planes, trains, ships). In principal, if all the gold in the world disappeared tomorrow it would have minimal effect. If all the world's oil disappeared the global economy would collapse instantly. Quote Link to comment Share on other sites More sharing options...
R K Posted February 17, 2012 Share Posted February 17, 2012 A very false comparison (gold/oil). The value of gold is almost 100% sentiment driven. The value of oil is driven by the fact that it is by far the most important energy source for the World's transport system (cars, trucks, planes, trains, ships). In principal, if all the gold in the world disappeared tomorrow it would have minimal effect. If all the world's oil disappeared the global economy would collapse instantly. I was comparing bubbles. Oil was $20, $150 then $35. A bubble's a bubble, unless it's a new paradigm, which also referred to. I guess we'll find out eventually, but even if it's a new paradigm it doesn't prevent the price of oil falling 75% during its life in the new paradigm. It just might be a long wait. Or it might not. Who knows. Quote Link to comment Share on other sites More sharing options...
@contradevian Posted February 17, 2012 Share Posted February 17, 2012 Erm we are selling Brent crude for $$$ so for little more than Mervs printers ink (and the risk of a slight rise in inflation) we are earning more $$$ for the same amount oil? I'm reminded of a recent post by Sir Harolm m where he suggested that Merv might be playing a blinder if the exchange rate remained stable, and the banks were able to fill their balance sheets with foreign cash. I'm not clever enough or an economist enough to deduce whether this is part of that process! Quote Link to comment Share on other sites More sharing options...
Guest spp Posted February 17, 2012 Share Posted February 17, 2012 Striking similarity to the 76-80 gold bubble which had a massive sell off in late 76, prior to the final blow off top in Jan '80. Just over 3 years. Oil has that massive collapse into late '08, followed by X3 over the following 3 years. With an average bubble duration of 3.5 years it would be consistent with a blow off top into the summer followed by a long secular collapse (20 years or so). Ditto gold of course. Red Knight Disinformation Alert 2008 - 201x is NOT 1976 - 80. Adolph Volker has left the building! The financial system was possibly broken back then. Have you not considered the system being a debt delusion ever since? Excessive compulsive disorder...look it up! Quote Link to comment Share on other sites More sharing options...
Democorruptcy Posted February 17, 2012 Share Posted February 17, 2012 Erm we are selling Brent crude for $$$ so for little more than Mervs printers ink (and the risk of a slight rise in inflation) we are earning more $$$ for the same amount oil? I'm reminded of a recent post by Sir Harolm m where he suggested that Merv might be playing a blinder if the exchange rate remained stable, and the banks were able to fill their balance sheets with foreign cash. I'm not clever enough or an economist enough to deduce whether this is part of that process! Devalue your currency then buy foreign cash with it? Quote Link to comment Share on other sites More sharing options...
OnlyMe Posted February 17, 2012 Share Posted February 17, 2012 (edited) We know what happens. It happened in summer '08. Recession/depression, banks collapse, chaotic forced deleveraging, QE due to zero bound etc etc. At the time it appeared that '08 was the oil bubble blow off top, but it is starting to look plausible that it was the penultimate top (ditto gold as it happens) and we're now into the final blow off. At some point this will likely end via demand destruction or US rapidly replacing ME oil imports or whatever. We'll either then get the historically usual secular bear commods markets for 17-20 years or else we'll get Grantham's 'new paradigm' of resource depletion meeting increasing demand for the remainder of our lives. Yes, the bubble just grew and grew - more like it was intentionally inflated by the central banks, aided and assisted by the retail banks until they totally ******ed the spending power of the average cnsumer so much they could neither borrow or consume more to keep it inflated. They are playing the same game now, but usng even more (absurdly) extreme policies. Likelihood is that the end effect will be worse, affecting many more poepl and delivering a sucker punch that more of the population will not be able to get back up from. Edited February 17, 2012 by OnlyMe Quote Link to comment Share on other sites More sharing options...
Pent Up Posted February 17, 2012 Share Posted February 17, 2012 High petrol prices to cause a recession better print some more QE funny money to stop the recession. Do you work for the bank of England? Quote Link to comment Share on other sites More sharing options...
Democorruptcy Posted February 17, 2012 Share Posted February 17, 2012 Likelihood is that the end effect will be worse, affecting many more poepl and delivering a sucker punch that more of the population will not be able to get back up from. What form do you think this sucker punch will take? Quote Link to comment Share on other sites More sharing options...
200p Posted February 17, 2012 Share Posted February 17, 2012 (edited) Beautiful chart. Oil is going much higher, and it will be the thing that make the pips squeak, forcing interest rates up to break the back of inflation. We're not there yet, no way. I think such a time won't come until 2015/16. Edited February 17, 2012 by MrTReturns Quote Link to comment Share on other sites More sharing options...
200p Posted February 17, 2012 Share Posted February 17, 2012 It's time to dig out those Jimmy Rogers 2005 Commodity podcasts and books again... ^CRB index Quote Link to comment Share on other sites More sharing options...
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