Did you know that the average equity holding period in 1948 was four and a half years? Today it is less than 30 seconds. The ever-growing number of market participants and the rising amount of available cash coupled with technological advances (first and foremost high-frequency traders/flash boys) make sitting on a position for a longer period of time risky. Commodity futures markets are no exceptions from this trend as it was laid bare to see last Wednesday. These were not the reason why the market dropped but why it fell more than $3/bbl and traded in a range of almost $7/bbl. Without the massive amount of money under investment and electronic trading the daily damage would have probably been mitigated.
The price fall came as market players concluded that despite the significant rise in tension between the US and Iran oil production is unlikely to be affected. This realization, however, led to an over-reaction just like last September when Saudi oil facilities were struck. Although back then the Kingdom temporarily lost half of its production it successfully assured the market that no supply shortage was forthcoming. The weakness that followed both occurrences took the price of oil below the pre-incident levels.
Last Wednesday’s sell-off was partially triggered by President Trump announcement that the US would not retaliate the Iranian retaliation. Although just a day before his briefing he had threatened to destroy 52 Iranian sites, including cultural sights, at the end of last week he declared, through his UN envoy, that the US was ready for serious negotiations with Iran. Obviously, it was nothing more than a publicity stunt that once again confirmed the unpredictability and the ad-hoc nature of the US foreign policy.
Anyway, nerves have been greatly calmed and consequently oil prices finished the week well off the highs. WTI settled a few points above $59/bbl after losing $4.01/bbl on the week. Brent shed $3.62/bbl on a weekly basis and closed at $64.98/bbl. Another few dollars jump is currently not anticipated but in case of a flare up in tension between the warring parties shorts will understandably want to be on the safe side again and they would cover at any price causing sharp but short-lived spikes. Violent rallies are not expected to last unless physical production is negatively impacted. Even in that case it is worth noting that we are in the traditionally low demand growth quarter so any protracted upside potential will depend on the extent of supply shortages. The next set of monthly reports will come out tomorrow (EIA), Wednesday (OPEC) and Thursday (IEA) nevertheless it is useful exercise to reiterate last month’s prediction for the 1Q 2020 oil balance.
It is discouraging. The highest call on OPEC came from the EIA (29.17 mbpd) and the lowest one from the IEA at 28.50 mbpd. The average of the three agencies stood at 28.93 mbpd. Recent estimates put the December OPEC output level around 29.50 mbpd, above the forecast call. We shall see how in about two weeks’ time how OPEC complies with the new quote set in December but global stock draws in this quarter and next are not anticipated. Prolonged price strength will only materialize in 1H in case any unexpected supply outage exceeds OPEC’s spare capacity, which is around 1.5 mbpd. The second half of the year, however, looks more encouraging.
In the meantime anywhere else in the world
The assassination of Gen. Qassem Soleimani and the consequent Iranian strikes of US air bases understandably stole headlines from other developments. The US-China trade talks are progressing in the background and the House of Commons in the UK passed the Withdrawal Agreement Bill last Thursday.
US-China trade talks: Phase 1, the interim agreement, could be signed on Wednesday, or shortly afterwards, the president announced. Apart from the thawing of the tension with Iran this is probably the other reason why US stocks reached yet another all-time high last week. Tariffs are expected to be reduced and China should step up its purchases of American goods, let it be agricultural, energy or manufactured goods. The Chinese Vice Premier, Liu He, is reportedly in Washington DC until Wednesday for the ceremony, the Chinese commerce ministry said.
After Phase 1 is concluded negotiations will apparently start straight away to thrash out the details of Phase 2. The comprehensive agreement might not be finished until after the upcoming presidential election, according to Mr Trump. This would certainly not please China and might be nothing more than brinkmanship or trying to gain leverage. After all, the impact of trade wars and import tariffs are highly questionable. US Commerce Department analysis found that American companies have suffered losses of $46 billion since the beginning of 2018 due to the Administration’s trade policies.
Brexit: the House of Commons voted 330 to 231 in favour of the Withdrawal Agreement Bill last week. The UK now will leave the European Union on January 31 unless something unexpected happens as the House of Lords scrutinizes the bill. On February 1 negotiations will start with the EU to strike a trade agreement. The UK Prime Minister is adamant that he would not seek an extension of the current transition period, which expires on December 31 giving 11 months to conclude the deal. Boris Johnson is confident that the parties will come to an agreement by the end of the year but his optimism is not shared by EU negotiators. Lots of finger pointing is anticipated in coming months as we shall hear the expression “level playing field” on a frequent basis this year from both sides. Those who thought that by last Thursday’s vote the worst is behind us must think again.