Biden/Harris bullish for oil prices

We know that the Democrats are furiously painting themselves green, to appeal to millennial voters. This sounds negative for oil demand: how will Exxon survive in a country where everyone is forced to buy a Tesla?

But prices are determined by the cost, and many of the Democratic policies will take out production. Assuming this moves the supply curve down across the reasonable range of oil prices, this is going to make oil more expensive, and will result in bigger profits for the established producers with low-cost wells. This is the thesis of this article on SA, which seems fairly convincing to me, although it focuses almost exclusively on the supply side, and not on the demand side. Historically, moves to green sources of energy seem hardly to have moved the needle on the steadily increasing demand for oil. It has had a fairly devastating impact on the demand for gas, so it may just be that this is because the supply/demand curve for CO2 emissions hasn’t reached down into oil yet, because it’s been killing demand for coal so far.

Anyway, this is an interesting graphic in its own right.

Markets today

This is the end of the week when the new vaccine was announced. Stocks have been flying, with the exception of FAANG stocks, which are supposedly benefiting from the lockdowns. Old economy stocks have outperformed, but over any timescale over a week or so the tsunami of Fed liquidity creation has surely been the bigger force. It’s started to push down the dollar again, but not by much. I happened to notice that tobacco stocks are giving a yield of over 8% in some cases. At some point, there will be no funds yet to divest of unethical stocks, and at that point some investors are going to start picking up these stocks for yield because “If I don’t own these, someone else will, and will be the receipient of big dividend cheques.” The complication is, however, that CB liquidity will flow into the stocks which are bought by passive funds, and so the unfavoured stocks will continue to be unfavoured. Nothing much can be done about this until the Boomers start to draw down their savings en mass, which should trigger the mother of all reversals. I emphasise that the timescale for this is entirely unknown, but probably should be the end of the next forty years.

Close

Pretty dull close. Value still outpacing growth by a good chalk, but both going up. The key seems to go short of cash. NDX still was close to SPX: 1.07% plays 1.38%. In currencies the biggest mover seems to have been MXP, the Mexican peso, up about 1% against the USD. DX is down 0.25% Commodities: copper up quite a lot, more than the precious metals. Steel is up quite a bit (6.5% over five days). Wheat, corn & soy all up, modestly. Energy down, but up on the week.

Chart for the day

Over a longer-term timescale, it would appear that the steepener trade is a pretty safe bet. This is the 30Y-5Y yield difference (which isn’t the most perfect measure, but shows the direction of movement)