Friday 13 Jan
Oil prices have been trending down for half a year. Given the number of times that ‘high energy prices’ have been used as an excuse for things getting more expensive, you may be surprised to read this, but it’s true!
All the factors that made oil expensive before are still around. Russia is still bombing Ukraine. The world is waking up into a world where covid is endemic. Even China has given up on the idea that it can be contained. Oil companies are very reluctant to commit to large-scale capital expenditures because, yanno, windfall taxes (which crimps supply). The world is running out of oilfields which are vaguely economic with oil at $70 a barrel. There are widespread mumblings that the Fed is libering up for a 180 degree pivot.
So far, the charts are not convincing. We have had four false dawns since the Autumn. Today may be nothing more serious.
I know I wrote about the general move towards a more normal shaped yield curve, which seems never to come. Going to shorter maturities than Treasuries, I think it’s worth looking at Eurodollar futures, which are just forward 3M LIBOR futures. The near-end steepening view can be expressed by buying a fairly near-dated future (e.g. Dec 23) and selling a longer-dated one (e.g. Dec 24) as a calendar spread. This is a faily cheap way of expressing such a view, and, seems quite tolerated by Interactive Brokers, in the sense of not requiring much in the way of additional margin. Futures are dangerous things and the last thing I’d want to do would be to advise you to trade them. I guess an exception could be made if you really understood how to trade them, but if you did you’d be ignoring this sentence and the one before it.
Have a great weekend!