LONDON (Reuters) – Most commentators and oil analysts are convinced a further rise in prices is inevitable in the next few years as emerging market consumption grows and supplies increasingly come from more costly and technically challenging sources such as ultra-deepwater.

While there are disagreements about the extent and the timing of price changes, there is a remarkable degree of consensus about the direction: up. But the roller-coaster experience of the last five years should have taught forecasters to be much more cautious about extrapolating trends and assuming the future direction is obvious.

Price forecasts are notoriously unreliable. There are simply too many variables and too much uncertainty about the current state of the market let alone how supply and demand will evolve in future. The crucial role of expectations in price formation adds an element to “reflexivity” which is hard for forecasters to anticipate or model accurately.

Reflexivity is a concept attributed to billionaire financier George Soros, in which perceptions of market direction and market fundamentals influence one another.

Forecasters’ confidence prices can only increase in future seems misplaced. On closer inspection, many of the factors which make price rises seem inevitable are flawed or unpersuasive. At present there are no fundamental reasons oil prices must increase above the current level of around $80 per barrel in real terms (once inflation and exchange rate changes are taken into account). Nor is there any reason to expect a spike in prices similar to 2008.

Prices have remained stable in a relatively narrow range of $65-85 for more than 12 months. While prices are unlikely to stay at this level forever, there is no compelling reason to expect the next move to be higher than lower, or for the current trading range to break down in the short to medium term. Risks to the outlook appear balanced, as they should be if the market is discounting expectations properly.

SHORT-TERM OUTLOOK

NEW YORK (Reuters) – Looking back from a vantage point in 2020, many analysts may pinpoint Fed Chairman Ben Bernanke’s speech on rebalancing the world economy as the moment when the United States surrendered unquestioned financial and economic leadership and acknowledged the shift to a multipolar world.

At one level, Bernanke’s speech was simply a well-argued and carefully supported statement of the obvious. Currency pegging by China and other emerging markets has perpetuated a two-speed recovery from the financial crisis, with the United States and other advanced economies stuck with low growth and high unemployment, while emerging markets struggle with capital inflows and inflation.

But at another level, Bernanke admitted the United States could no longer dictate economic and financial terms to the rest of the world. His plea for surplus countries to allow their exchange rates to appreciate to ease the burden of adjustment on deficit economies was an admission U.S. policymakers could no longer determine policy unilaterally based on domestic conditions and force the rest of the world passively to adapt.

Weakened by the financial crisis, a structural trade deficit and high unemployment, the United States has belatedly discovered the virtues of multilateralism — or at least international cooperation.

OUR CURRENCY, YOUR PROBLEM NO MORE

It wasn’t always like this. Safely isolated by the oceans in the 19th century, then emerging as the undisputed economic and financial colossus after the ruination of the European empires in World War Two, the United States has traditionally defined sovereignty in terms of absolute freedom of action and freedom from international entanglements and constraints.

The Bretton Woods Agreements establishing the International Monetary Fund and World Bank are notably lopsided in the responsibilities they place for adjustment on surplus and deficit countries. While British negotiators, including John Maynard Keynes, wanted a more symmetric allocation, American negotiators, confident the United States would be the biggest surplus country, ensured nothing constrained America’s freedom to set her own economic policy.

NEW YORK (Reuters) – Public pronouncements by Goldman Sachs(GS.N: Quote, Profile, Research) that it has largely exited proprietary trading activities and refocused on flow trading serving customers have met with predictable scepticism among outside observers.

Cynics expect Goldman and other banks to fold prohibited activities into their flow desks and relabel them market-making so they can continue as before — doing an end run round the Volcker Rule limits on prop investment by institutions with access to the Fed’s discount window.

But the firm may be reinventing itself more than outsiders realize, even before the rule is implemented, and shifting its strategy away from trading risk.

Filings with the Securities and Exchange Commission (SEC) show a substantial reduction in the amount of risk being taken by the firm’s trading arm. Average daily value-at-risk (VaR) across the currency, fixed income, equities and commodity desks has been trending down consistently for the last five quarters.

At the same time, net trading revenues have become less variable with fewer big up days (when the firm reported trading profits in excess of $100 million) and fewer down days (when the firm lost money.) Greater stability in trading revenues is consistent with Goldman scaling back prop activities and relying more on dealing commissions, spreads, option premiums and routine market-making, which are much more stable.

(Graphic showing Goldman’s average daily VaR and net trading revenues: r.reuters.com/vuz25q )

The firm began scaling back prop trading long before the proposed Volcker Rule was announced by President Barack Obama in January 2010 and later enacted as Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010. For Goldman and other banks, the retreat from prop activities has been driven by a confluence of factors.

LONDON (Reuters) – No one doubts BHP Billiton is the smartest, most innovative mining company in the world. It has shaken up a once-sleepy sector and transformed pricing and marketing of raw materials from copper to coal and iron ore.

BHP is the mining sector’s Goldman Sachs. It employs the best minds and campaigns to change practices which have been long-established but which the firm considers outdated in a successful quest to unlock immense value for its shareholders.

According to the firm’s website “At BHP Billiton we’re looking for people who want to grow with us around the globe, take chances and stand out from the crowd. We need people who embrace tomorrow, have vision, love stretching their minds and going far beyond what they thought was achievable.”

But like Goldman, BHP’s success has come at a price. The company is unloved. BHP’s success has bred envy among its competitors. Worse, the company’s aggressiveness has made it a host of enemies among competitors, customers and regulators. Now that backlash is hampering the company’s ambitions to grow.

In the past few decades, the company which revels in its nickname as the Big Australian has found itself embroiled in acrimonious battles with China over the price of copper and iron ore; steelmakers in Europe and Asia over pricing; Australia’s Labor Party over mineral taxes; and competition authorities around the world over the proposed takeover and later the joint venture with Rio Tinto, both now abandoned.

While BHP has won many battles, it has left a legacy of bitterness and mistrust, which is now shaping the reception of big deals. Regulators in particular have become very sceptical when reviewing the firm’s plans.

DEAL MACHINE SPUTTERS

LONDON (Reuters) – In a compromise, the Federal Open Market Committee (FOMC) has approved a cautious and conservative second round of quantitative easing (QE2) which may satisfy nobody but should prevent internal splits from widening.

It is designed to provide some marginal stimulus to asset markets and economic recovery without further undermining the confidence of foreign investors.

The best way to characterise the $600 billion bond-buying programme implemented over eight months is “QE-lite”. The total is slightly higher than expected, but spread over a slightly longer period. The Fed has done almost exactly what it signalled over the last few weeks — no more (there was no “shock and awe”) and no less.

There is an implicit commitment to continue buying securities until the end of June 2011 and to buy $600 billion in total but the figures are described as an intention, so they could be varied in response to changing conditions.

The committee preserved its flexibility by promising to “regularly review the pace of its securities purchases and the overall size of the asset-purchase programme in the light of incoming information and will adjust the programme as needed”.

Supporters of large-scale, open-ended asset purchases will note there is no finite end to the programme. The committee pledged to continue employing all the policy tools at its disposal “as necessary to support the economic recovery and ensure that inflation, over time, is at levels consistent with its mandate”. It was the Fed’s equivalent of “all necessary means”.

Opponents will be relieved the committee has only sanctioned $600 billion so far, a relatively moderate amount. The regular review means even this could be halted early or scaled back if conditions improve or inflation and commodity prices start to accelerate too much.

LONDON (Reuters) – Prospects of a second round of quantitative easing (QE2) offer China a perfect opportunity to reduce its holdings of U.S. Treasury bonds by selling them back to the Federal Reserve.

Excessive concentration of their reserve holdings in U.S. Treasury, agency and mortgage-backed bonds has long concerned China’s top policymakers. Senior officials have called on the United States to maintain the value of the debt.

But having cornered the market with massive bond investments, China’s reserve administrators have found themselves unable to diversify without risking a collapse in bond prices that would realise substantial losses.

QE2 offers China a way to reduce its reserve holdings without disrupting the market. The Fed’s programme is unlikely to be large enough for China to exit the market completely.

It would probably not want to anyway. It makes sense for China to continue holding a substantial proportion of the portfolio in U.S. Treasury bonds. But this is the perfect opportunity to lighten the holdings slightly.

Openly selling bonds to the Fed would be seen as extremely unfriendly, since it would largely offset the intended stimulus effect. However, QE2 will probably be implemented through a series of reverse auctions affording the sellers substantial anonymity.

It will also generally support prices for all bonds, even those not purchased directly by the Fed. So there will be an opportunity to sell some of the holdings onto the open market or back to the Fed itself.