Category Archives: Commodities

Why Did Commodity Prices Move Together?

As strange as it may seem, most economists loudly disputed the notion that the rise in commodity prices, particularly in the first half of 2008, was in large measure due to financial speculation. More and more analytical work (such as comparisons of price action in commodities trades on futures exchanges with ones that have large markets but are not exchange-traded, like eggplant, a staple in India, and cooking oil) have dented the orthodox view.

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Michael Hudson: Europe Tilts East Towards China

The sudden rush of countries joining China’s infrastructure bank, including supposed US allies like the UK, Germany, and France, demonstrates the desire of not just emerging but also advanced economies to have access to international institutions that are not dominated by the US. Whether the infrastructure bank actually winds up being better, as opposed to simply different than existing institutions remains to be seen. But as Hudson describes, the World Bank sets a low bar.

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Gail Tverberg: The Oil Glut and Low Prices Reflect an Affordability Problem

Tverberg argues that low oil prices likely to be with us for a long time, due to the fact that demand will remain relatively weak. Given the reluctance of governments to engage in aggressive enough spending measures, the idea of that more economies will become mired in a Japan-like slump or weak demand is entirely plausible. And that’s before you get to the wild card of a Eurozone unraveling.

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The Fed’s and Republicans’ War Against Dodd Frank and How That Preserves the Greenspan Put and Too Big to Fail

A new story by Gretchen Morgenson of the New York Times highlights how the Federal Reserve and the Republicans* are on a full bore campaign to render Dodd Frank a dead letter, with the latest chapter an effort to pass HR 37, a bill that would chip away at key parts of Dodd Frank. But the bigger implications of this campaign is how these efforts serve to limit the Fed’s freedom in implementing monetary policy. In other words, Fed general counsel Scott Alvarez is undermining the authority of his boss, Janet Yellen.

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What are the Odds of a Commodities-Led Global Financial Crisis?

Yves here. While the odds of commodities-triggered 2008 style meltdown is still not the most likely outcome, recall that that pessimists like yours truly assessed the likelihood of Seriously Bad Things Happening as of early 2008 at 20-30%, which I then saw as dangerously high. In other words, tail risks are bigger than they appear.

Some of the things that favor worse outcomes than one might otherwise anticipate is investor irrationality, or what one might politely call herd behavior. For instance, a major news story today was how investors are dumping emerging markets assets willy nilly, when many are not exposed to much if any blowback from lower commodity prices and quite a few are seen as net beneficiaries. The offset is that central banks have been conditioned to break glass and overreact when banks start looking wobbly. But the Fed may be slow to get the memo, since it sees recent data (the last jobs reports and retail sales data) as strong, and is also predisposed to see its medicine as working even though it is really working only for those at the top of the food chain.

Note that this report is from Monday in Australia, and look how much oil prices have dropped since then. WTI is now at $54.28 per Bloomberg.

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“I Hate That Oil’s Dropping”: Why Mississippi Governor Phil Bryant Wants High Oil Prices for Fracking

Yves here. We posted yesterday on how, despite falling oil prices having a ricochet effect across the entire energy complex, so far shale oil well shutdowns didn’t appear to be proceeding at the expected pace. John Dizard of the Financial Times attributed continuing cash-flow-negative exploration and development to continued access to super-cheap funding. He also noted that even when fracking operators were cut off from their money pipeline, a new wave of speculators was likely to sweep in and try bottom-fishing among distressed companies. That meant that normal market discipline would be circumvented, meaning production levels could remain at uneconomically high levels, keeping prices low.

A second danger for the aspiring fracking-industrial complex is that prevailing production forecasts show the US having production well in excess of its domestic consumption levels in a few years. Production of needed export infrastructure would need to ramp up rapidly for so much shale output to be moved overseas. But not only are there “will the transport systems be in place” doubts, there’s also a reason to question whether this investment will pay off. On current trajectories, fracking output peaks in 2020 and falls gradually over the next decade, and declines more rapidly after that. 12 to 15 years of decent utilization is very short for specialized facilities.

Third, some readers, presented with the scenario above, said, basically, “No problem, production will focus on the lowest-cost areas like Marcellus.” As the article below points out, there are parts of the country that have gotten a nice boost from the energy boomlet and will suffer if they aren’t in the most competitive areas cost-wise. And their lenders are also at risk.

Finally, current cost forecasts don’t allow for the possibility of production delays or additions expenditures due to local protests and/or higher environmental standards put in place. Before you pooh-pooh the idea that anything might stand in the way of energy barons, consider the industry they are damaging: real estate, which is another powerful and politically connected industry. If fracking water contamination or fracking-induced earthquakes start affecting higher population density areas (suburbs, cities), we may have a Godzilla versus Mothra battle between competing elites in our future.

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Russia Can Survive An Oil Price War

Yves here. This article is an important sanity check on the impact of the current oil price war on Russia. We’ve seen similarly skewed conventional wisdom on the Saudis: “No, they can’t make it on a fiscal budget basis at below $90 a barrel,” completely ignoring the fact that the Saudis clearly believe it is in their long-term interest to suffer some costs to inflict pain on some of their enemies, and render some (a lot) of shale oil and alternative energy development uneconomical, which increases their ability to extract more in the long term from their oil asset.

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Michael Hudson: Putin’s Pivot to Asia

Yves here. Understandably, US reporting on the just-finished APEC summit focused on Obama’s objectives and supposed achievements. Russia has historically not been a major force in the region and thus received less coverage here. It was therefore surprising to see our man in Japan Clive tell us that Japanese media coverage of Putin at APEC was on a par with the column-inches given to Obama.

On Real News Network, Michael Hudson describes how Putin is shifting Russia’s export focus and economic alliances towards Asia, particularly China. Putin did better at the APEC summit than most Western sources acknowledge, and that could have longer-term ramifications for the US.

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Saudi Cut In Oil Price for US May Lead To Price War

Yves here. We pointed out last month that the US was on the list of Saudi targets when it made clear it was not supporting oil prices at a level higher than $80 a barrel. Some readers rejected the idea that Riyadh would launch a price war to undermine the US, when in fact the desert kingdom has been mightily unhappy with US policies in the Middle East for some time (in case you managed to miss it, ISIS started out as Prince Bandar’s private army and odds are high that it continues to get Saudi support).

A major news story today, that the Saudis are letting oil prices drop further, provides more support for our jaundiced assessment last month.

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Federal Reserve Policy Keeps Fracking Bubble Afloat and That May Change Soon

Yves here.  This post highlights an issue that has also been flagged by Wolf Richter, that fracking depends on junk bond financing that has been made unnaturally cheap by the machinations of the Fed. Steve Horn conflates QE with the Fed’s super-low interest rate policy known as ZIRP, when they are distinct, but they have been implemented with the same idea in mind, that of encouraging investors to make riskier investments, particularly riskier loans.

Horn cites sources that suggest that the Fed could start undoing its  rock-bottom rates in 2015. Bear in mind that that’s a minority view.

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