***CONTAINS NEW UPDATE MATERIAL
Two weeks after Davos, we can see the lies for what they were. The markets are not being “dumb Bears” – they’re discounting the élite Bull
Somewhere deep under somewhere in Wall Street, I suspect there is a Think Tank. Or maybe its a space-pod platform. Who knows from sh*t any more?
It’s probably at Goldman Sachs – a fair assumption given that they run the world. In there sit half a dozen stressed executives who spend their lives coming up with excuses that can act as a distraction from probable reasons, and alternative explanations for obvious reasons. There’s probably both a futures and a derivatives market in these rationales, sold at vast profits under the radar to Sovereign governments. I’d be willing to bet George Osborne is a major client, and the Beijing politburo won’t be far behind.
George, it transpires, is thought to be “weird” by most of his colleagues, and highly unlikely to get the leadership after CallmeDave hangs up his Grensens. I suppose it would be hard to hang up one’s hangups….and also give up those time-consuming recreational habits. Weird or not, the Draper needs increasingly complex excuses to explain a series of utter falsehoods, fiddled datapoints and failure as UK Chancellor, and so ironically I’d imagine there’s a spring in his step at the moment that isn’t entirely to do with Colombian exports. Why? Because he has a new best friend: the unravelling global economy.
Here’s the next excuse to look out for: for the sixth month in a row, UK output is being carried by ‘services’, by which of course we mean financial services consisting almost entirely of unknown and/ worthless value contracts zipping electronically back and forth like so many speed-freaking pigeons. Far from ‘rebalancing’ the UK economy, Camerlot has in fact shrunk the manufacturing sector down from 10.7 to 8.9% in six years flat. The ‘rationale’ coming from the Goldman Pod for Osborne will be that there is a global demand fall-off.
But there’s a problem here, because the Goldman Egg inhabitants have been raking in billions of dollars telling Texas to go all-out on the “oversupply” story on oil as a way of explaining the gobstoppingly obvious falloff in demand. And now that the oil price is once again falling (“We see it at close to the bottom now” said a human derrick on CNN yesterday) Glut Avenue is sort of getting closed off as the way through this situation.
Sadly, it looks like George is on relatively safe ground, because the data increasingly support the demand theory, and not the over-supply bollocks. I’ll start with one simple objective chart to make clear what’s been happening, and then go on to other even more conclusive evidence of what most thinking people already know, not too deep down at all, is a developing global slump.
These numbers are jointly agreed by the OECD and the International Energy Association (IEA) to be what’s actually been happening in relation to demand over the last two years. This is the third Q1 in a row that’s forecast to be down versus Q4, but the first to show a drop from that Q4 over Q3. The drop coincides with (a) a recorded Chinese slowdown accompanied by (b) a plummeting Baltic Dry Index and (c) a eurozone economy that flatlined despite the ECB’s QE blast.
Global oil supplies expanded by 2.6 million barrels a day in 2015. During Q4, however, those supplies were slashed by a whopping 77.5% to 0.6mb/d. I’m not sure many people – being fed a daily diet of OPEC geopolitics, US shale and Iran coming on stream – actually cottoned on to that. While that still leaves a massive inventory, it does suggest to me an industry that saw clouds forming on the horizon.
In fact, the IEA specifically notes that ‘weak economic sentiment in China, Brazil, Russia and other commodity-dependent economies, saw global oil demand growth flip from a near five-year high in 3Q15 (2.1 mb/d) to a one-year low in 4Q15 (1.0 mb/d).’ As I point out above, this is a new development.
It is certainly true to say that refined oil production has been barely affected, but pull-through is no more than an indicator – especially in an environment where very soon stock build will put storage infrastructure under pressure and could see floating storage become profitable again. It is the price of supply crude and equivalents that is falling, but as of Q4 2015, demand for refined product is falling. There could be any one of half a dozen reasons why refining continues as is, from a need to keep skilled staff maintaining machinery in best condition via supply backup all the way through to a simple desire to keep things ‘looking good’.
End users of refined are in turn giving the lie to the “it’s just a supply glut” argument. China’s demand has been an average 2.5% lower since November, and we are starting to see small drops in both American and European demand.
***LATER UPDATE: Figures from Irene Marquite on Twitter:
You can see how wrong/far out the Establishment is by these numbers from Twitter at 16:00 CET today. Refined petrol stocks are up 6M barrels, the consensus expectation was 1.7; and crude stocks were up 7.8, the consensus said it’d be 4.8.
This does tend to show a stockpiling problem either side of the refining process.
In this context I confess to finding the daily circular arguments on business sites and TV channels about the oil price/stock market levels correlation hard to rationalise. Of course they’re correlated: demand is slowing which means economies are slowing which means profits will shrink which means that stocks will fall.
This potential for an accelerating slide explains pretty clearly to me why the two mantras among the business and banking élites since the Chinese wobble last August have remained consistent: that the Shanghai doesn’t represent the Chinese economy, and the oil price is about over supply not falling demand.
After the Christmas break, the markets woke up and decided finally that this was a false story. As every day produces new supporting data for that view, the markets continue to fall along with the price of oil.
Yesterday was a sea of Red around the global bourses. Overnight, late intervention by the PBOC kept the Shanghai drop down to less than 1%, but the Nikkei fell 3%, and the FTSE is already down, as is the Dax, and the Eurostoxx. Brazil (bedevilled by more economic fears now due to Zika) was 4.9% off yesterday, the Dow 1.8% adrift. After a brief and tiny rally, the Bears are in charge on Brent Crude.