Views on commodities and energy
The spread between front-month oil futures and contracts for later delivery on the New York Mercantile Exchange (see Fig. 1) has widened dramatically this month. (See Fig. 2)The widening contango frequently portends a rise in inventories. For example, in Fig. 3, it can be seen that when the discount for fronth-month crude to second-month crude widened to near $4 a barrel earlier this year, inventories jumped to 19-year highs. The relationship between inventories and the outright futures price can be seen in Fig. 4.
from Summit Notebook:
From the start, "green shoots of recovery" was not necessarily the British government's wisest choice of words and after a few months of being on everyone's lips, has given way to a more lowly metaphor.
Business Minister Baroness Vadera raised the hackles of the political opposition in January when she spotted "a few green shoots" on a day of large-scale job losses and collapsing share prices.
Evidence of economic revival is still elusive, but there are ever louder hints that we have at least seen the worst -- or bottomed, to use the mot du jour.
Bottom as a noun and a verb was widely brandished by speakers attending Reuters Global Energy Summit this week, who based on their analysis on a slight increase in available credit, a tentative pick up in energy demand and rising commodity prices.
OPEC Secretary General Abdullah al-Badri has an interest in spotting the kind of confidence that has driven oil prices up from a low below $35 a barrel in December to almost double that.
"I have no doubt that the recession has bottomed out, but is it a V shape or a U shape?" he asked during a Reuters summit session.
Others were less convinced and the most bearish of them all was a representative of the very oversupplied tanker market, where freight rates have sunk to their lowest levels in decades, with not a green shoot in sight.
"We have seen lower than the bottom," said Erik Ranheim, a manager at oil tanker association Intertanko.
Oil prices have been trading in an unusually strong positive correlation with equities markets over the past few months on hopes that signs of an economic recovery could mean a boost for energy demand.
But with oil and product inventories swelling and little sign of demand improving in the United States and other big developed economies, analysts warn that the linkage may be hard to maintain, especially if U.S. motorists cut back on vacations this summer.
One of the most significant comments about the world economy this week may have come from Klaus Kleinfeld, the chief executive officier and president of Alcoa, America's largest aluminium producer. Amid the reporting of pretty horrible earnings -- a $497 million net loss versus a year-earlier gain of $303 million -- Kleinfeld said things may not get much worse.
"There are some signs in many of our end industries for a bottoming out," he said.
The correlation between oil prices and the dollar seen since the third quarter of 2007 has weakened. Investors had sold the dollar as U.S. economic prospects dimmed and bought oil as a hedge against inflation and uncertainties in the supply of raw materials. The relationship eased late last year as fundamental pressure from slumping demand and the slowdown of the overall economy pushed oil lower independent of the actions of the dollar, and analysts said the link might not return in the near term.
The drop in U.S. oil demand against year-ago levels has begun to slow as data is compared with weak levels from 2008, when consumption slowed due to the slumping economy and the high fuel prices seen during the first half of the year.
The graph shows the change in U.S. demand over the four-week period from levels from the previous year.
Here are two outstanding examples of the ripple effects around the world when the dollar stumbles. Oil is at a record high at $110 and gold has topped $1,000 an ounce for the first time, while the dollar has fallen below 100 yen for the first time in more than a decade. Most commodities are priced in dollars, so the weaker the greenback, the cheaper it is for holders of other currencies to buy gold and oil. Gold is also generally seen as a hedge against oil-led inflation. Gold has jumped 19 percent this year on top of a 32 percent rise in 2007.