Oil price could hit $107/barrel by end 2023!

Read all about it, here. Normally, I’d be delighted to read a piece of research like this, but this note comes from Goldmans. Don’t get me wrong, Goldmans employs some bright people. Commodities are complex, and oil is the most complex of all, because not only is it a tradeable commodity, it’s highly politicized. Obviously, in recent times the sanctions against Russia have been covered in a lot of detail, but historically, since the first world war at least, oil has been more than just a source of energy. It has been a source of military dominance.

One part of me wants to believe that for a system as complex as the global economy, attempting to forecast rates out beyond a couple of months is essentially impossible. Keynes talked somewhere about the folly of trying to predict what interest rates would be in twenty years.

He did have something to say about productivity growth over decades-long timescales, so he was not opposed to looking into the future. Maybe he just didn’t want to forecast the value of a variable that is the outturn of so many opposing forces (generically, the supply and demand of funds for lending).

Anyway, although I’m obsessively interested in what will happen to the price of oil, and I am — deep in my heart — a bull, I find it hard to believe that the price of oil would go up by around 30% in the course of three quarters when the world economy may quite possibly fall into a deep recession, with a consequential jump in the value of the dollar (the denominator in the price of oil).

Over the longer term, to me it seems implausible that the price of oil should not go up. Even if the marginal energy commodity is wind power (or solar), these are likely to be considerably more expensive than today’s oil price (around $76/barrel), this will still drive up the price of oil. However, commodity prices move in mysterious ways, and anyone who thinks that the price of a basket of commodities should slavishly follow any broad inflation index has been very wrong for a long time.

Rudy is on a roll

Rudy Havenstein calls out the BS, again. Today’s post has a link to a new podcast featuring the heroic David Stockman. Listen to it here. I am a huge fan of Stockman, as regular readers will be aware.

And so is Matt Stoller. These commentators give a much more credible account of what is happening at the Fed than the mainstream press. OK, they are biased, but there is no such thing as an absence of bias, and basing your news coverage on press releases from official sources is about as biased as you can get.

The Fed has too much power, and with that power has come corruption. I would love to think that the market will triumph, but the casino is rigged, so it’s safer not to place any bets.

This a typical couple of paragraphs of a very well-informed criticism of the institution that is, practically, the monetary regulator for the whole world.

For thirteen years, from 2008 to 2021, the Fed kept interest rates at zero, and had bought eight trillion dollars of bonds to make money cheaper for banks. One can argue the wisdom of the Fed’s actions, but it happened. This zero interest rate policy (ZIRP) meant that banks like SVP got used to free deposits and very low returns on lending and bonds. In 2021, the Fed began encountering serious signs of inflation, and the Fed’s most important job, along with full employment, is to make sure that price levels are relatively stable. To address inflation, it had to tighten financial conditions. 

Now, you’d think that the Fed would have thought about the impact of higher interest rates on the banks it regulated and supervised. That’s kind of the whole point of being the supervisor of big banks and the monetary authority. One might even think that the Fed would want to do some sort of, oh I don’t know, stress test, on how higher interest rates could affect banks. But it did not. The Fed did not prepare the banking system for normalizing interest rates, because that would have required constraining what big bank executives wanted to do.

Wrap

The dollar was down by ~0.5% today (103.6). This gave risk assets a boost, but didn’t make a huge difference to bonds. Gold and friends were up, but most other commodities were mixed. Even though the authorities probably have enough to sustain ‘confidence’, the equity markets have not given them the seal of approval.

The ‘backstopping’ of unlimited deposits at large banks is tantamount to a huge amount of money creation (and ‘QE’, since those deposits are balanced against Treasuries in banks). Of course, it is money creation for those who already have millions and who, almost certainly have a very high propensity to save. So, maybe nothing will come of this. One can only hope.

And no, this is not an original take. Of course, Goldman’s take is precisely the opposite:

But a repeat of the turmoil 15 years ago seems unlikely. For one, SVB’s collapse “was a very idiosyncratic situation where you had a bank that had taken a lot of interest rate or duration risk on their portfolio — coupled with the fact that they had a very concentrated deposit base that was very exposed, obviously, to the venture capital community and venture capital portfolio companies that were experiencing these very significant outflows,” Goldman Sachs Research’s Richard Ramsden, business unit leader of the Financials Group, says on the latest episode of Exchanges at Goldman Sachs. Moreover, “the quality of the assets, so the quality of the collateral, is orders of magnitude better today than it was in 2008,” Lotfi Karoui, chief credit strategist tells host Allison Nathan. “There’s also greater transparency over its valuations today relative to the run up to the global financial crisis.”

This came from an email to me, which doesn’t seem to exist in its entirety on the web, but the key research (I think) is here.

I guess everyone has an opinion on why SIVB failed. Nobody can read them all, but this one is from a very well-informed commentator.