What do negative oil prices tell us?

Yesterday brought a new development in the word of negativity. We regularly look at negative interest-rates and bond yields here and a couple of years ago or so noted negative prices for gas in the Permian Basin.More recently we have had to come to terms with negative economic growth rates. But then there was something new to see. From the BBC.

The price of US oil has turned negative for the first time in history.

That means oil producers are paying buyers to take the commodity off their hands over fears that storage capacity could run out in May.

Demand for oil has all but dried up as lockdowns across the world have kept people inside.

As a result, oil firms have resorted to renting tankers to store the surplus supply and that has forced the price of US oil into negative territory.

The price of a barrel of West Texas Intermediate (WTI), the benchmark for US oil, fell as low as minus $37.63 a barrel.

What has happened here?

The BBC does get some bits right bit also some wrong so let us start with the correct bits. The oil price has been under pressure due to lower demand as the tweet below highlights.

Coronavirus has wiped out more than 90% of international flights ( @ZSchneeweiss )

Some were pointing out that they had filled up their cars ahead of the lockdowns only not to drive anywhere giving us a form of storage for these times which is in car petrol or diesel tanks! But the crucial point was that in most cases ( like me) they have not driven anywhere. I am sure you can think of other examples.

Missing from the BBC piece is that in a type of turf war Saudi Arabia and Russia decided to sing along with Elvis Costello on the 8th of March.

Pump it up, until you can feel it
Pump it up, when you don’t really need it

I still remember the shock of that Sunday night into Monday morning when the oil price fell to US $30. It seemed a big deal at the time and was but the increased supply in an example of hubris or accident or both flooded into a collapse in demand.

There is another factor in play so let us return to the BBC on the 12th of this month.

The initial details of the deal, outlined by Opec+ on Thursday, would have seen the group and its allies cutting 10 million barrels a day or 10% of global supply from 1 May.

This U-Turn was trumpeted at the time by the BBC who rather curiously were for once in concert with The Donald.

The big Oil Deal with OPEC Plus is done. This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for all!

How wrong can you be?

The next factor is that the cuts do not start until May 1st and that matters because the May future ends this week. Many futures contracts are like that and wither expire in the month before or roll over to a later month in the month before. So May is April and confusingly expires before the output cuts in er May. Please do not shoot the messenger.

Next returning to the original BBC article they have made a mistake.

As a result, oil firms have resorted to renting tankers to store the surplus supply

The problem with WTI is that it is a land locked contract and so they cannot do that. By contrast Brent is a sea bourne contract and thus is being stored in oil tankers which are available for obvious reasons. Here is shipbrief.com from a few days ago.

As of April 16, data provided by VesselsValue shows that of the 802 VLCCs on the water 60 are now being used as floating storage. Suexmaxes come in at 37 of the 566 live vessels while crude Aframaxes number 35 out of 694.

So Brent Crude dodged a bullet for now anyway because there is somewhere to store it whereas there are obvious issues for landlocked contracts in using supertankers.

So pressure came on the WTI contract and specifically the May one as it expires before the output cuts and there is another issue tucked away in its definition.


You have to take some of the black stuff whereas for Brent you can simply settle in cash. So as the May WTI contract came to its end it found a lot of people long oil suddenly facing up to the fact that they were being squeezed and even worse that anyone they might try to deal with knew it. Thus the price fell. Then it got added to by volumes being low and I am sure that meant that some gave it a nudge or “low ticked” it.

Let me explain that. If you have a large position say short 50,000 oil futures and you can move a price by selling 10 then you might be willing to sell that 10 for -$10. In itself it is crazy but should the price of the 50,000 move only marginally you can sing along with Hot Chocolate.

So you win again, you win again

Have I seen people do this? Yes.

As you can see there were quite a lot of factors in play and context is needed because the June futures contract was at US $22 or so and trading actively all day. There were also elements of confusion because it turned out there were some places you could store some WTI crude so perhaps in the panic some brains got a little frazzled.In fact it became such a mess I could see some of the trades being busted. The main factor against that is that it would be very embarrassing so probably will not happen.


Let me point out a consequence I tweeted yesterday.

The contango in the oil price may trade like an option. It will be interesting to see if the June future ( $22.84) is pulled down to the spot price ( $11) or whether there will be more of a merger over the next month…

I was already thinking that the June WTI would get that sinking feeling as May faded from view. That was based on two factors. Firstly valuing the gap between it and spot as an option and secondly thinking of spot being an anchor it will be pulled down too. With the June WTI future at US $12.82 as I type this we see yet another example of financial life being on speed.

If we now look at the economic consequences I am one of the few who welcome lower oil prices and their impact on inflation. This will help workers and consumers in terms of real wages in what are going to be hard times. There are a couple of nuances to this. Let me start with the fact that as we are using less of it the gains are reduced. The second is that there is also a switch from producers to consumers as oil producers will be hit hard. In fact there is an irony here because this is one of the causes of where we are which is the Saudi/Russian attempt  to get the oil price below the break even for US shale oil wildcatters.

Next comes a consequence via financial markets which is that some funds and banks must be in trouble from this. Before this latest phase we were seeing stories like this.

SINGAPORE (Reuters) – Singapore oil trader Hin Leong Trading (Pte) Ltd, which has begun talks with lenders to extend its credit facilities, owes $3.85 billion to 23 banks, two industry sources said on Thursday.

Now will be worse with the only saving grace being that volumes were low. Of course that may yet change with the June future falling today.

What is next? Perhaps we could see QE for oil from the US Federal Reserve…..

Let me finish with some humour from The Guardian back in December 2013.

A former British Petroleum (BP) geologist has warned that the age of cheap oil is long gone, bringing with it the danger of “continuous recession” and increased risk of conflict and hunger.




What is the economic impact of a US $100 price for crude oil?

The last few days have seen something of an explosion in mentions of a one hundred-dollar price for crude oil. Usually they mean the price for Brent Crude Oil which went above US $86 per barrel last week and is now around US $84. This means that we have seen a 50% rally over the past year for it. Some care  is needed as the other main benchmark called West Texas Intermediate is around ten dollars lower at around US $74 per barrel. The last time we saw the spread between these two indices widening then it looked like the bank trading desks and especially the Vampire Squid were to blame and it went as wide as twenty dollars. For those wondering what the Russians get then the Urals benchmark is around 4 or 5 dollars lower than Brent but what always amazes me is the price that Canada get. The price of Western Canada Select is US $25.20 although it was as high as US $58 in the summer. Whatever the cause it is a very odd price for a type of oil that is relatively expensive to produce.

Economic effects

The Far East

The Financial Times took a look at some research on the impact here.

According to Citi’s Johanna Chua, Asian countries suffer the most when oil prices rise because, aside from Malaysia, most are net oil importers. Singapore runs a sizable 6.5 per cent oil and gas deficit, followed closely by Pakistan, Thailand, Sri Lanka and Taiwan. Indonesia and Vietnam manage slightly smaller deficits of roughly 1 per cent.

Given this exposure, many of these economies see the largest inflation swings when oil prices rise…….Sri Lanka, the Philippines and Vietnam lead the pack, with Thailand, India and Taiwan rounding out the top six:

They do not say it but we are of course aware that especially these days inflation rises can have a strong economic impact via their impact on real wages. Of course if an economy is vulnerable higher oil prices can push it over the edge and it has hit Pakistan.From the International Monetary Fund or IMF.

The fast rise in international oil prices, normalization of US monetary policy, and tightening financial conditions for emerging markets are adding to this difficult picture. In this environment, economic growth will likely slow significantly, and inflation will rise.

Some of the impact of the IMF arriving again in Lahore feels eye-watering.

The team welcomes the policy measures implemented since last December. These include 18 percent cumulative depreciation of the rupee, interest rate increases of cumulatively 275 bps, fiscal consolidation through the budget supplement proposed by the minister of finance, a large increase in gas tariffs closer to cost recovery levels, and the proposed increase in electricity tariffs. These measures are necessary steps that go in the right direction.

Whether the population in what is a poor country think this is in the right direction is a moot point but as a cricket fan let me wish the administration of Imran Khan well. Sadly just as I type this the price of oil has just risen another 8.5% via this morning’s devaluation.

What the research above seems to have skipped over to my mind is the impact on China as according to WTEx it was 18.6% of the world’s oil imports totaling US $162 billion last year. Its own production is in decline according to OilPrice.com.

Crude oil production alone fell by an annual 4 percent to 191.51 million tons — or about 3.85 million bpd in 2017 — to the lowest in nine years, due to maturing fields and few viable new discoveries at home.

So we are left wondering how strong a factor the higher oil price was in the monetary easing in China last weekend?

First World

The FT gives us a familiar list of those it expects to be impacted.

For Bank of America Merrill Lynch’s Ethan Harris, Japan, Europe and the UK are “clear losers,” with growth there coming under pressure by 0.2 to 0.5 percentage points next year. Not only do all three import their oil, but also, households in Europe and the UK save little, leaving them with smaller nest eggs to buffer price increases.

I am not sure about the latter point but much of this is familiar with Japan being a big energy importer and Europe not a lot different.The UK became a net importer a while back although there have been some changes recently. What I mean by that is that according to the official data we are importing less and producing slightly more. Firstly that is not quite the picture on North Sea Oil we are sometimes told which did fall but seems currently stable whereas we are using less (-7.4% in the latest quarter). Perhaps it is the impact of a growing share of renewables in electricity production which is 20% or just under 7 Gigawatts as I type this.


The IMF researched the impact of a higher oil price last year.

A 10 percent increase in global oil inflation increases, on average, domestic inflation by about 0.4 percentage at impact. The effect is short-lasting—vanishing two years after the shock—, similar between advanced and developing economies and tends to be larger for positive oil price shocks than for negative ones.

I am sure that nobody is surprised that there is more enthusiasm for raising than there is for cutting prices! If we translate that into what we have seen over the past 12 months then the IMF would expect to see a rise in inflation of 2% due to this. More accurately we should say up to as not all prices have risen as much as Brent Crude.

The Winners

There are obvious winners here such as Saudi Arabia and several other Gulf States, Russia, Canada, Brazil and Mexico. Some African countries such as Ghana and Nigeria will benefit and the Norwegian sovereign wealth fund will have to invest even more money. But as it is American foreign policy which has driven the reduction in supply mostly via pressure and embargoes on Iran it is rude to point this out?

Crude oil production in the U.S. shale patch will hit 7.59 million bpd next month, the Energy Information Administration said in its latest Drilling Productivity Report. This is 79,000 bpd more than this month’s estimated production. ( OilPrice.com )

I have written before that due to their high debts this industry is driven by cash flows which currently are pouring in.Is it a coincidence that US foreign policy is so beneficial for them? Or if we go deeper the role of QE and low interest-rates in the shale oil business model.


Some mathematical economists may be sure there is no impact as overall this is a zero sum game. Also for central bankers the oil price is non-core but in reality it does have an impact as oil producers spend less than oil importers on average.

 If oil prices head above US$100 a barrel, it could shave 0.2 percentage points from global economic growth next year – but this hinges crucially on the US dollar, according to Bank of America Merrill Lynch. ( Straits Times)

I think it might be more than that but the issue is never simple. Also they are right to point out that the US Dollar has strengthened when the convention is for it to fall with an oil price rise. Continuing my theme above is it rude to point out that the US military industrial complex is likely to be a major beneficiary from the extra cash flowing into the Gulf?

There is a catch here which is that so far we have seen “experts” promise us US $200 oil and US $20 oil and we have seen neither? So perhaps we should be looking at the economic effect of an oil price fall.Meanwhile one likely winner from the oil price rises has managed via extreme incompetence to be a loser.









India is counting the cost of its crude oil dependency

Tucked away in the news stream of the past few days has been a developing situation in India. Whilst the headlines have been made by Turkey there have been currency issues in the largest part of the sub-continent as well. Here is DNA India on the subject.

Indian Rupee on Thursday had hit a fresh record low, the Rupee opened at 70.22 versus the US dollar. In wake of the Turkey crisis, the Indian currency started off the session on a weak note. Earlier on Tuesday, after opening at a marginal high of 69.85 against the US Dollar, the Indian rupee touched an all-time low of 70 per US dollar.

The Indian currency touched an all-time low of 70.08 against the US dollar, while marking depreciation of around 10 per cent in 2018.

The fall came majorly due to a drop in Turkish Lira, which helped the US dollar to gained strength on the back of fears that economic crisis in Turkey could spread to other global economies.

In fact it fell to 70.7 this morning versus the US Dollar which is an all time low. Some of the move may have been exacerbated by the issues facing Turkey but over the past couple of days the Turkish Lira has rallied strongly whereas the Rupee has continued to fall. A factor has been the strength of the US Dollar or what is being called King Dollar. This reminds me that themes and memes can change rather quickly in the currency world if we step back in time to the 25th of January.

“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters in Davos. The currency’s short term value is “not a concern of ours at all,” he said.

If pressed now I guess the US Treasury Secretary would emphasise this bit.

“Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency,” he said.

Returning to the Rupee we see that it had started to fall before the turn in the US Dollar as conveniently it began at the turn of the year when it was at 63.3 versus it.

What are the consequences?

The first is simply inflation or as DNA India puts it.

Continuous downfall in Indian Rupee is worrisome for imported goods as the cost of imports will go up.  Currently, India imports around 80 per cent of its crude requirement. The rupee downfall will expand India’s import bill and will eventually be contributing to the inflation.

This will add to the situation below. From The Times of India.

Inflation based on consumer price index (CPI) for the month of July came at 4.17 per cent, government data ..

That was an improvement and as so often in India the swing factor was food prices.

The food inflation came at 1.37 per cent, driven by cooling of pulses, vegetable and sugar rates.

However a boost is on its way and as inflation is above the 4% target things could get especially awkward should food prices swing the other way.


One of the economics 101 assumptions is that higher interest-rates boost a currency but as I warned back on the 3rd of May the situation is more complex than that and Argentina reminded us again by raising to 45% earlier this week. As for India we see this.

increase the policy repo rate under the
liquidity adjustment facility (LAF) by 25
basis points to 6.5 per cent. ( Reserve Bank of India August Bulletin)

That was the second rise this year and these have reversed the previous downwards trend. Of course the problem is that the RBI is perhaps only holding station with the US Federal Reserve.


India maintains a sizeable foreign currency reserve which was US $406 billion at the last formal update in March. However it will not be that now if this from Reuters on Tuesday is any guide.

Subhash Chandra Garg, secretary at the department of economic affairs…………said the RBI has spent about $23 billion so far to intervene ..

So we see that the fall has come in spite of intervention which sits rather oddly with the claim from Subhash Chandra Garg that the currency fall does not matter. Also it is usually rather unwise to indicate a currency level as he did (80) as events have a way of making a fool of you.
Anyway using reserves can help for a while but care is needed as quickly markets switch to calculating how much you have left and how long they will last at the current rate of depletion. At that point intervening can make things worse.
Looking at India’s  domestic economy a clear factor in the currency debate is its trade position. The latest numbers were as highlighted above by DNA India heavily affected by the oil price.


Oil imports during July 2018 were valued at US $ 12.35 Billion (Rs. 84,828.57 crore) which was 57.41 percent higher in Dollar terms and 67.76 percent higher in Rupee terms compared to US $7.84 Billion (Rs. 50,565.29 crore) in July 2017.

Such a development feeds into the existing Indian trade problem.

Cumulative value of exports for the period April-July 2018-19 was US $ 108.24 Billion (Rs 7,29,823.08 crore)……….Cumulative value of imports for the period April-July 2018-19 was US $ 171.20 Billion (Rs. 11,54,881.70 crore).

Whilst a little care is needed as petroleum exports grew by 30% overall Indian export growth is on a tear at 14%. Many would love that, but the rub is that not only are imports much larger but due to India’s oil dependency they are rising at an annual rate of 17%. So as we stand things are getting worse and according to Business Standard there is trouble ahead.

India’s crude oil import bill is likely to jump by about $26 billion in 2018-19 as rupee dropping to a record low has made buying of oil from overseas costlier, government officials said today…….. If the rupee is to stay around 70 per dollar for the rest of the ongoing fiscal, the oil import bill will be $114 billion, he said.


The other side of the coin about the Indian economy was highlighted by the IMF only last week.

India’s economy is picking up and growth prospects look bright—partly thanks to the implementation of recent policies, such as the nationwide goods and services tax. As one of the world’s fastest-growing economies—accounting for about 15 percent of global growth—India’s economy has helped to lift millions out of poverty.

Although developments since the writing of the report may have more than a few wondering about this bit.

India can benefit from improving its integration with global markets.

Perhaps it is a case of Blood,Sweat and Tears.

What goes up must come down
Spinnin’ wheel got to go ’round

There was of course the domestic issue created by the demonetisation debacle not that long ago but the real achilles heel for India is oil. Something of a perfect storm has hit it where the oil price has risen by 40% over the past year and more recently that has been exacerbated by a stronger US Dollar.

So both the economic and Rupee issues seem as much to do with energy policy as conventional economics. Can India find a way of weaning itself off at least some of its oil dependency?

Me on CoreFinance TV


Is there a shortage of US Dollars and if so why?

At the moment we are seeing quite a few trends combined which look as though they are returning us to a position where there is a shortage of US Dollars. This is troubling as this was an issue in the genesis of the credit crunch as back then it affected banks and particularly European and Japanese ones. It seems odd as the foreign exchange market is very liquid but maybe it is not liquid enough or at least at the right price. Back in March Pictet Bank provided something of an explainer.

The problem is a spike in the differential between LIBOR and the Overnight Index Swap, or the premium over the risk-free rate non-US banks pay to borrow dollars outside of the US.

The spread has risen to 42 basis points, the highest since February 2012, and up from 25 basis points at the start of last month and just 10 basis points in November.

While the rise does not pose a systemic risk, it has nevertheless raised the cost, and reduced the availability, of dollar-denominated loans for non-US banks by a considerable margin and in short space of time.

It is pretty much back to that level (43) after going above 60 and just for clarity that is 0.6%. Here is the first lesson  of this saga in that in our present world some interest-rates do not seem to have much impact at all as for example I did warn on the third of this month that a rise in Argentinian ones would backfire. Some 9.75% higher later I guess my point has been made for me. However here we have a 0.6% or so at the peak looks in terms of Carly Rae Jepson that it “really,really,really,really” matters. This appears to be driven by two factors the first is that it affects the “precious” otherwise known as the banks and is in US Dollars. Of course the official story is rather different as the excerpt below from the May Inflation Report of the Bank of England shows.

In the years following the crisis, funding spreads narrowed as banks repaired their balance sheets and became more resilient.

I am resilient, we are resilient , it has unexpectedly collapsed ….

US Dollar

This has been a factor as we note that recently the US Dollar has been what we might call King Dollar again. If we use the US Dollar Index or DXY for this we see that it has rallied four points since mid April from over 89 to over 93 now. The bigger turn came at the opening of June 2014 when it has dipped below 80. So the price of the US Dollar has risen too over this phase. Whilst the DXY is now out of date in trade terms as for example the Chinese Yuan is missing it does a job for this sort of analysis as the Yen and Euro are there.

US Interest-Rates and Yields

This has been a case of singing along with Jackie Wilson.

You know your love (your love keeps lifting me)
Keep on lifting (love keeps lifting me)
Higher (lifting me)
Higher and higher (higher

The US Federal Reserve has increased its official interest-rate to between 1.5% and 1.75% and nearly as importantly has been raising the rhetoric about there being more (3/4) increases this year. I am not convinced by this but if we look around markets seem to be accepting it perhaps on the grounds that unlike other central banks the Fed has at least been reasonably consistent.

Also there have been rises in bond yields with the media concentrating on 3% for the ten-year Treasury Note and then 3.1%. But for this purpose more significant is what has taken place at the shorter maturities. The chart below gives us a handle on what has been taking place there.

Let me be clear here this is a financial markets thing rather than a real economy thing but these do have a way of leaking across and tripping up the unwary. Adding to this we are seeing real world effects too as I note this from Reuters.

Interest rates on U.S. 30-year fixed-rate mortgages rose to the highest in seven years as a bond market selloff this week propelled 10-year yields to the highest since July 2011, Freddie Mac said on Thursday………Thirty-year mortgage rates averaged 4.61 percent in the week ended May 17, matching the level last seen in May 2011.

Of course they affect the banks from another route.

Quantitative Tightening

One way that the supply of US Dollars is being reduced is quite basic as the US Federal Reserve has set out to do that explicitly. From a balance sheet which just passed US $ 4.5 Trillion we now see that it has fallen to US $4.36 trillion which put like that may not seem a lot but that is US $140 billion or so. The pace is also picking up a bit so in terms of narrow money or what central bankers have loved to call “high-powered money” there is less of it to go around from this source at any rate.

Crude Oil

This too seems to have been a factor in the recent moves and there is some logic to this as of course the vast majority of oil business is settled in US Dollars. Not all of it anymore but a large proportion. Thus the rise in the price exemplified by the fact that the price of a barrel of Brent Crude Oil is now just below US $80 or some 52% over the past year has also sucked US Dollars out of the system. This is my view is of course mostly a timing thing as the oil producers will then spend them as for example one of the ways the money gets recycled is by the Gulf States buying weapons but we know that timing matters in the credit crunch era. Supposedly because we are more resilient as I look up that particular page in my financial lexicon for these times.

There are many views on this but here is one from a social media exchange I was involved in.

My thesis is the $/oil correlation is a consequence of oil market design/paradigm shift. This began 1st July 2017 & completed a couple of months ago. ie the dollar is now on an If I’m right, when (not if) oil falls the $ will fall with it ( @cjenscook )


Let us now look at it the other way from the point of view of the central bankers. Let me take you to the US Federal Reserve website where with something of a fanfare it declared this back in the day.

In May 2010, the FOMC announced that in response to the re-emergence of strains in short-term U.S. dollar funding markets it had authorized dollar liquidity swap lines with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank.

They had been gone for all of three months and were supposed to go as my emphasis below returns us again to my financial lexicon for these times.

 In October 2013, the Federal Reserve and these central banks announced that their existing temporary liquidity swap arrangements–including the dollar liquidity swap lines–would be converted to standing arrangements that will remain in place until further notice.

Very little is being used right now as one European bank has taken 80 million US Dollars worth in revolving 6 day credit or there are more than one. But this reminds me of the old wartime analogy of President FD. Roosevelt and loaning your neighbour a hose in case he has a fire. Meanwhile the emerging markets have started to be called the submerging ones.

What are the prospects for inflation ( and hence wages )?

Yesterday saw a revealing insight into the establishment view of inflation. The world economic outlook of the International Monetary Fund was in general upbeat and positive but I noted this.

The outlook for advanced economies has improved, notably for the euro area, but in many countries inflation remains weak, indicating that slack has yet to be eliminated

You may note that it ignores the possible link between lower inflation and better economic growth in its rush to tell us that inflation below some arbitrary target is a bad thing. It really is old era economic thinking to say that low inflation is a sign of slack in the economy as well. Missing also is any thought that growth and inflation are being measured badly and that perhaps we have more inflation ( for example by factoring in one of the largest parts of any budget which is housing) and less growth than the IMF would like us to believe.

The same muddled thinking is evident in this excerpt as well.

Persistently low inflation in advanced economies, which could ensue if domestic demand were to falter, also carries significant risks, as it could lead to lower medium-term inflation expectations and interest rates, reducing central banks’ capacity to cut real interest rates in an economic downturn.

Central banks capacity to cut interest-rates was mostly reduced by them cutting them so much already! If that was the weapon implied here why would they need to do it again? Also as we know some central banks have been willing to employ negative interest-rates. If we move on in a word of low wage growth then most people would welcome low inflation and low inflation expectations. If we put this another way the IMF is skirting over the implication below in its view on asset valuations.

In advanced economies, monetary policy should remain accommodative until there are firm signs of inflation returning to targets. At the same time, stretched asset valuations

What are the inflation prospects?

So far in 2017 headline consumer inflation has been really rather low. For example the CPI in the Euro area is at 1.5% and the US CPI is at 1.9%. There was something of a warning though in the latest US data if we look at some of the detail.

Increases in the indexes for gasoline and shelter accounted for nearly all of the seasonally adjusted increase in the all items index. The energy index rose 2.8 percent in August as the gasoline index increased 6.3 percent.

So let us look at the oil price trend.

Crude Oil

If we look at the price of a barrel of Brent benchmark crude oil then we see it has been rising since late June when it dipped below US $45 per barrel as opposed to the US $56.62 as I type this. There have been various factors driving this of which one has been the economic growth described by the IMF. In addition there has been this factor according to Reuters.

A pact between the Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia to cut output by 1.8 million barrels per day (bpd) in order to prop up prices is due to expire by the end of March 2018. Discussions to extend the pact are taking place, but production elsewhere is rising.

There has been doubt as to how the OPEC deal has actually held but from its point of view the last 3 months or so have been a success as the oil price has risen. The other factor is the shale oil wildcatters in the United States who will also be benefitting from the higher price for crude oil as we wait to see if they expand output. If you recall the cash flow business model for the shale oil wildcatters then 2017 has been a good year as income will have been strong as we note higher prices are being accompanied by this.

U.S. producers are not participating in any pledge to restrain supply, and output has risen by 10 percent this year to over 9.5 million bpd.

Other Commodities

Reuters calculates a commodity price index which is currently at 183.2 which is just under 4% lower than a year ago albeit like in the oil price there has been a rise since late June. Back then it had dipped to 166.5. If we look at the index which excludes energy prices we see that there is a familiar if more subdued pattern as it has risen from just below 116 to 123.6 now.

If we look at metals prices we see Metal Bulletin reporting this today.

The underlying trends in the base metals are upward but those metals in or near high ground seem to be having to absorb selling which is capping the upside, while copper and nickel prices that are still some way below the highs seem to be having an easier time working higher, but neither seems in any rush. We remain quietly bullish, but expect trading to become choppier as prices run into more bouts of scale-up selling.

Dr.Copper had seen quite a surge as a year ago it was US $2.17 as opposed to the US $3.06 now as we wait to see the next move. I guess churches will be nervous about their copper pipes and roofs again. By contrast the Iron Ore price has been heading south at a rapid rate recently and this morning has fallen below the US $60 mark.

Benchmark Australian iron ore fines dropped 4.1% Tuesday to a three-month low of $59.1 a tonne, based on data provided by The Steel Index, taking losses since the start of September to more than 20%. ( Mining.com)

They attribute the fall to this factors.

Iron ore prices continued their downward trend Tuesday amid ongoing concerns that looming steel production cuts in China on environmental grounds will sap steel mill demand……..At the same time, supply from Australia — the world’s No. 1 iron ore producer — has risen,further pressuring prices.

Food Prices

The United Nations calculates an index for this.

The FAO Food Price Index* (FFPI) averaged 178.4 points in September 2017, up 1.4 points (0.8 percent) from August and 7.4 points (4.3 percent) above September 2016. Firmer prices in the vegetable oil and dairy sectors were behind the small month-on-month rise in the value of the FFPI.

So a rise overall which is influenced by the 27% rise in dairy prices over the past year as we note the influence of the butter shortage. Mind you if you have a sweet tooth and are a Maroon 5 fan the news is much better as the sugar price has fallen by 33% over the past year.


We see that there has been a nudge higher in the beginnings of the inflation food chain over the past 3 months or so. Much of this has been the higher oil price but there have been rises in some metal prices too although not Iron Ore. However whilst the trend is low especially for this stage in the economic cycle it can still be damaging. The rising cost of one of the basic essentials ( housing/shelter ) in many places is mostly ignored and at other times claimed as growth. Secondly the fact is that wage growth is overall low too so that pockets of real wage growth are also much less abundant that we would usually expect in a boom. If the IMF gets the inflation it seems to want there is no guarantee that wages would rise as well so it would have made us all worse off.

So in essence if we look at food and energy prices they are the major players in the consumer inflation measures we have and of course the central banks and IMF try to ignore them as “non-core.” Oh well…….


What are the economics of Scottish independence?

Yesterday saw the First Minster of Scotland fire the starting gun for a second vote on independence from the UK for Scotland as the pace of possible change ratchets up yet another notch. With it came am intriguing view of how long a lifetime is these days! Although I am also reminded of the saying that “a week is a long time in politics”. However as ever I look to steer clear of the political melee and look at the economics. So how is the Scottish economy doing?

Economic growth

The Scottish government has published this data.

When rounded to one decimal place, at 2016 Q2 annual GDP growth in Scotland was 0.9 percentage points lower than in the UK. At 2016 Q3, annual GDP growth in Scotland was 1.2 percentage points lower than in the UK. Between 2016 Q2 and 2016 Q3, the gap between annual Scottish and UK GDP growth increased by 0.3 percentage points in favour of the UK (when rounded to one decimal place).

As you can see the recent performance has been around 1% per annum slower than the UK and may well be accelerating. With the UK economy overall having grown by 0.7% in the last quarter of 2016 that seems likely to have continued but of course there are always dangers in any extrapolation. If we look back we see that in the pre credit crunch period GDP growth was similar then Scotland did worse and then better as presumably the oil price boom benefited it ( although the oil sector itself is excluded). Then until the recent phase Scotland did mildly worse than the rest of the UK.

Looking ahead

The Scottish government plans to improve this and with an eye on future policy has set a European Union based objective.

To match the GDP growth rate of the small independent EU countries by 2017.

How is that going so far?

The latest data show that over the year to 2016 Q3 GDP in Scotland grew by 0.7% whilst GDP growth in the Small EU was 3.5% (measured on a rolling four quarter on four quarter basis). When rounded to one decimal place, this resulted in a gap of 2.8 percentage points in favour of Small EU. This compares to an annual increase in GDP to 2016 Q2 of 1.0% in Scotland, and an increase of 4.2% in the Small EU – resulting in a 3.3 percentage point gap in favour of Small EU (when rounded to one decimal place).

As you can see the gap here is much wider and leaves Scotland with a lot of ground to recoup. If you look at the list that may well get harder.

The small independent EU countries are defined as: Austria, Denmark, Finland, Ireland, Portugal and Sweden. Luxembourg has been re-included in the newest update due to a change in availability of data.

Ireland is proving a hard act to follow.

Preliminary estimates indicate that GDP in volume terms increased by 5.2 per cent for the year 2016. GNP showed an increase of 9.0 per cent in 2016 over 2015.

It is an awkward fact that the 21% economic growth registered by Ireland in the first quarter of 2015 lifted the target away from Scotland and it continues to offer something hard to catch. Of course such large moves also challenge the credibility of the Irish data series.

What about employment?

Good but not as good as England currently.

Scotland’s employment rate of 73.6 per cent for Q4 2016, is the second highest across all UK countries, 1.3 percentage points below England. This indicates a worsening position compared with a year ago when Scotland had the highest employment rate across all UK countries, 0.2 percentage points above England (the second highest).

Natutral Resources

Crude Oil and Gas

Plainly Scot;and has considerable resources here although unless there are new discoveries these seem set to decline over time. There have also been big changes in the crude oil price as FullFact reported last October.

It is correct that crude oil prices are currently at around $50 a barrel. Back at the time of the first Scottish independence referendum in September 2014 oil was selling for just over US $90 a barrel.

Energy policy, and how oil revenue would be invested, was part of  the Scottish government’s vision for an independent Scotland……….”With independence we can ensure that taxation revenues from oil and gas support Scottish public services, and that Scotland sets up an Energy Fund to ensure that future generations also benefit from our oil and gas reserves. “

I think that FullFact were being very fair here as there were forecasts from Alex Salmond that the oil price would rise towards US $130 per barrel if my memory serves me right. Whereas it is now US $51 or so in terms of Brent crude oil. So the oil sector has seen something of a recession affecting areas like Aberdeen although there would have been gains for other Scottish businesses and consumers from lower prices.

The Fiscal Position

This has been affected both by the lower oil price and also by the recent trend to lower economic growth than the rest of the UK. The former was highlighted by this from the 2015-16 data.

Scotland’s illustrative share of North Sea revenue fell from £1.8 billion in 2014-15 to £60 million, reflecting a decline in total UK North Sea revenue.

This led to these numbers being reported.

Excluding North Sea revenue, was a deficit of £14.9 billion (10.1 per cent of GDP).

Including an illustrative geographic share of North Sea revenue, was a deficit of £14.8 billion (9.5 per cent of GDP).

For the UK, was a deficit of £75.3 billion (4.0 per cent of GDP).

This adds to an issue I reported on back in my Mindful Money days in November 2013.

So there is something of a shark in the water here. If we add in the fact that Scotland spends more per head than the rest of the UK then the IFS ( Institute for Fiscal Studies) considers that the fiscal position is more dangerous. Both the UK and Scotland spend more than they get in from tax but the Scottish position is more reliant on a fading source of tax revenue. This is what leads to the following conclusion.

As it turns out that source of revenue has ended at least for now and seems to be capped by the shale oil wildcatters for the next few years. All rather different to this.

But a current strength of the numbers is revenue from North Sea oil which was 18.6% of tax revenue in 2011-12 for Scotland.

Of course there would be quite a debate over the share of the UK national debt that would belong to Scotland but the fiscal position is presently poor.

What currency?

This poses a few questions so let me repeat the issues with using the UK Pound.

1. The Bank of England will presumably set interest-rates to suit England (and Wales and Northern Ireland). This may or may not suit Scotland.

2. The value of the pound will mostly be determined by the much larger English economy in some respects similar to the way that Germany dominates the Euro. That has not worked out well for many of the Euro nations.

3. This is to say the least awkward, if further bank bailouts are required. Will the Bank of England be the “lender of last resort” in Scotland? How does this work when it has an independent treasury? Just as a guide, individual nations in the Euro area had their own central banks which survive to this day partly because of this issue.

4. There is also the issue of currency reserves and intervention which presumably also stay with the Bank of England.

5. What about the money supply of Scotland which will again presumably be controlled by the Bank of England and set for the rest of the UK?

6. Has anybody bothered to ask the citizens of the rest of the UK if they are willing to take the risk of having Scotland in a currency but not a political or fiscal union? This would take place just as the Euro is demonstrating many of the risks of such an arrangement. But added to it for the rest of the UK would be new oil or gas discoveries pushing up the value of the pound and thereby making their businesses and industry less competitive.


Scotland plainly has economic strengths with its natural resources and financial services industry. However since the last vote there has been a deterioration in economic circumstances as we have seem growth fall below that of the rest of the UK. This has led to a problem with the fiscal deficit and it is hard not to think of the criteria for joining the European Union.

New Member States are also committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro in due course after accession.

We do not know what the national debt would be but the fiscal deficit is around treble the 3% of GDP target per annum in the Euro accession rules. Of course Euro members have often ignored it but they have been much stricter on prospective entrants. Quite a Euro area style austerity squeeze would seem likely and that has been associated with recessions and quite severe ones at that.

Charlotte Hogg’s Resignation

Back on the 1st of March I pointed out the lack of competence on monetary policy she displayed in front of the UK Treasury Select Committee. Today it was announced that she offered to resign last week but Mark Carney would not take it. Now he has.

Click to access charlottehoggletter130317.pdf


Click to access 028.pdf




What is the economic impact of a higher crude oil price?

One piece of economic news dominated all other yesterday and it was at least a change for the Trump and Brexit circuses to take something of a break. Instead we had the OPEC circus which finally came up with something. Of course we know that announcements are one thing and implementation another but there was an immediate impact on the crude oil price. From Reuters.

The price for Brent crude futures (LCOc1), the international benchmark for oil prices, jumped as much as 13 percent from below $50 on Wednesday and was at $52.10 per barrel at 0806 GMT, although traders pointed out that part of the jump was down to contract roll-over from January to February for Brent’s front-month futures.

U.S. West Texas Intermediate (WTI) crude futures rose back above $50 briefly before easing to $49.63 a barrel at 0806 GMT, though still up 20 cents from its last settlement.

Volumes were very high too which makes a past futures traders heart lighter although of course we need to note that this is a result of yet more central planning.

The second front-month Brent crude futures contract, currently March 2017, traded a record 783,000 lots of 1,000 barrels each on Wednesday, worth around $39 billion and easily beating a previous record of just over 600,000 reached in September. That’s more than eight times actual daily global crude oil consumption.

Also as we note the influence at times of banks on commodity markets ( I believed their trading desks helped drive the last commodity price boom) maybe such high volumes are a warning signal too. But if this lasts we have the potential for a type of oil price shock as we have become used to relatively low oil prices. Also central banks may have to make yet another U-Turn as of course they may find that they push inflation above target as a higher oil price adds to all their interest-rate cuts and QE style bond buying.

Let us have a little light relief before we come to the analysis and look at this from February of this year. From Bloomberg.

Oil could drop below $20 a barrel as the search for a level that brings supply and demand back into balance makes prices even more volatile, Goldman Sachs Group Inc. predicted.

Oh well…

A higher oil price is good for us?

I made a note of this when I first saw it as it is the opposite of my view. I also note that it is Goldman Sachs again. From Bloomberg.

Higher oil prices would be a boon for the global economy, according to Goldman Sachs Group Inc.

Really! How so?

Pricey crude means economies such as Saudi Arabia take in more money than they can spend, which financial markets help distribute through the rest of the world, boosting asset values and consumer confidence, the bank’s analysts Jeff Currie and Mikhail Sprogis wrote in a Nov. 22 research note.

Apparently we can ignore the elephant in the room.

Forget the stagflation of the 1970s.

Here is the explanation.

“The difference between today and the 1970s is that oil creates global liquidity through a far more sophisticated financial system,” Currie and Sprogis wrote. “More sophisticated financial markets in the 2000s were able to transform this excess savings into greater global liquidity that increased asset values, lowered interest rates, and improved credit conditions that spanned the globe.”

Convinced? Me neither and it is hard to know where to start. One view is that the world economic expansion drove the oil price higher. Another is that greater global liquidity is an illusion as we see so many markets these days which seem to lack it. For example we are seeing more “flash crashes” like the one which happened to the UK Pound overnight a few weeks or so ago. This is of course in spite of the fact that central banks have been doing their best to create global liquidity and indeed cutting interest-rates.. Still if it created “increased asset values” the 0.01% who no doubt represent Goldman Sachs best clients will be pleased. As a final rebuttal this ignores the impact of lower oil prices on inflation and the key economic metric which is real wage growth.

Did the credit crunch never happen?

From 2001 to 2014, excess savings outside the U.S. grew to $7 trillion from $1 trillion as oil climbed, according to Currie and Sprogis. The savings helped drive up values of things like homes and financial assets and loosened credit markets for consumers.

I guess this is the economics version of all those strings of alternative universes in physics where Goldman Sachs is in another one to the rest of us, or simply taking us for well, Muppets.

They are not the only ones as the IMF got itself into quite a mess on this front back in February.

Persistently low oil prices complicate the conduct of monetary policy, risking further inroads by unanchored inflation expectations. What is more, the current episode of historically low oil prices could ignite a variety of dislocations including corporate and sovereign defaults, dislocations that can feed back into already jittery financial markets.

Are these “jittery financial markets” the same ones that Goldmans think are full of liquidity? Also you may note the obsession with central banks and monetary policy and yes asset values are in there as well.

Returning to Reality

There is an income and indeed wealth exchange between energy importers and exporters. For example Oxford Economics did some work which suggested that a US $30 fall in the oil price would boost GDP in Hong Kong by 1.5% but cut it in Norway by 1.3%. So we get an idea albeit with issues in the detail as I doubt the UK (0.8%) would get double the GDP benefit of Japan (0.4%) which of course is the largest energy importer in relative terms of the major economies. Oh and there are bigger negative effects with Russia at -5% of GDP and Saudi Arabia at -4%.

However the conclusion was this.

Lower oil prices should give a sizeable boost to world GDP in 2015 and 2016

There was a time (July 2015) when the IMF thought this as well.

Although oil price gains and losses across producers and consumers sum to zero, the net effect on global activity is positive. The reasons are twofold: simply put, the increase in spending by oil importers is likely to exceed the decline in spending by exporters, and lower production costs will stimulate supply in other sectors for which oil is an input…… the fall in oil prices should boost global growth by about ½ percentage point in 2015–16,

It would also produce a fall in inflation which will be welcome to those who are not central bankers.


Should the oil price remain higher it will reduce global economic growth and raise inflation. If we compare it with a year ago it is around 10 US Dollars higher but we also need to note that in December 2015 the oil price fell to the Mid US $30s so we need to do the same to prevent an inflationary effect. As I have been writing for some months now unless we see large oil price falls inflation is on it way back. We are of course nowhere near the US $108 that a Star Trek style tractor beam seemed to hold us at a while back. But as I note the rise in some metals prices ( Zinc and Lead in particular) commodity price rises are back in vogue. So there will be plenty of work for those economists who want higher inflation explaining how they are right be being wrong.

There will also be relative shifts as consumers will be poorer as real wages fall but say shops in Knightsbridge and the like seem set to see more Arab customers. Japan will be especially unhappy at a higher oil price. But US shale oil wildcatters might be the happiest of all right now and may even boost US manufacturing as well. In the UK there will be a likely boost for the Aberdeen area.

Me on TipTV Finance

“Outlook for RBS is dreadful”, says Shaun Richards – Not A Yes Man Economics