Slipping up on oil and Greece?

March 2, 2012

Thursday’s crude oil price surge to its highest in almost 4 years (apparently due to a subsequently denied report from Iran of a Saudi pipeline explosion…phew!)  illustrates just how anxious and dangerous the energy market has become for world markets yet again this year and HSBC on Friday spotlighted its threat to the global economy and asset prices in a note entitled  “Oil is the new Greece”. The point of the neat headline hook was a simple one:

With Greece disappearing, at least temporarily, from the headlines, investors have quickly found a new source of anxiety thanks to the recent surge in oil prices

Just like many investors and strategists over the past month, HSBC rounded up its various assessments of the impact and fallout from higher oil prices, stressing the biggest risk comes from supply disruptions related to the Iran nuclear standoff and that any major political upheaval in the region would threaten significant crude spikes. “Think $150 or even $200 a barrel,” it said. It reckoned the impact on world growth, and hence the broader risk horizon depended on the extent of this supply disruption and the durability and scale of the price rise.  Worried equity investors should consider hedging their portfolios by overweighting the energy sector. Obvious winners in currency world would be the Norwegian crown, Malaysian ringitt, Brazil’s real and Russia’s rouble, the bank’s strategists said. The most vulernable units are India’s rupee, Mexican and Philippines pesos and Turkey’s lira.

Earlier this week, strategists at JPMorgan Asset Management said crude oil exposure could be useful to them as a hedge to their relatively neutral positioning on world equities.

We also added exposure to crude oil, as a partial hedge in portfolios. We believe this provides some offset to a neutral stock/bond position, should the global business cycle prove to be stronger than expected. To some extent, it also acts as a “tail hedge” against geopolitical event risk, given the febrile situation in the Middle East.

But the question of whether oil packs as much a threat for world markets as the systemic risks posed by the Greek debt collapse is an interesting one. Certainly the sort of random, nervy price movements late Thursday are reminiscent of the edgier days of the now two-year-old euro crisis. Familiar too is the often unfathomable second-guessing of political developments in the euro zone.  Yet for many people oil is just the new, well… oil.

It’s not really gone away over the past 18 months as an all-pervasive menace to the world economy and concerns about peak oil and the long-term decline in global supplies means even the slightest distortion to either supply or demand in future will likely instantly bring it back to the dashboard of all global investors.  The 60% surge in crude prices between August 2010 and April 2011 was arguably just as powerful in sapping world economic activity in the second half of last year as the euro crisis was — perhaps moreso. And even as financial markets and economics commentariat talked openly in the final months of 2011 of a western banking and sovereign debt collapse leading to a double-dip recession and even a worldwide depression — crude oil prices never had a weekly close back below $100 for the remainder of the year!

Complicating the impact however has been foreign exchange moves since oil reached a dollar-priced  record high of $147 in July 2008. These show just how much the “currency wars” of money printing, FX intervention, home bias and “safe-haven” trades in the interim have queered the pitch. The austerity-hobbled euro zone and Britain have actually seen crude prices hit record highs this year in euro and sterling terms even though, for the United States, dollar-denominated  still oil remains more than 10% below that peak. For strong-currency countries such as Japan, China and Switzerland, oil prices are more than 20% from their peak.

So, oil may indeed be more draining than Greece overall but big FX shifts are shaping the already uneven impact of crude prices between importers and exporters or developed and emerging countries.


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