It’s become a truism that the next bubble market is created in the ashes of the last boom.
It was the way the easy credit, US subprime/CDO/huge stockmarket boom was born in the embers of the tech and net booms which exploded in 2000-2001.
Its what’s happening now as tens of billions of dollars of speculative and non-speculative funds chase returns in the only market still alive and kicking: commodities, specifically the huge, highly liquid (no pun intended) oil market.
Overnight in world markets, nervous buyers (speculative and trade) emerged to trade oil four and eight years out from now: oil was bought and sold for delivery in 2012 and 2016. The trade also sent the most immediate price to a new high of $129.60 a barrel.
The price for 2016 was just over $US139 a barrel: which is either madness, considering what could happen between now and then, or a steal.
The oil price has leapt from around $US100 in less than four months, and is now well over double what it was a year ago. It’s a bubble that is enveloping the world, quickly, and in a way that no other bubble has grabbed us, because oil and other energy forms, are essential to the workings of the everyday economy.
And, unlike the explosion of the easy money/credit boom, the pricking of the oil bubble will be welcomed the world over, except in the next basket cases like Venezuela, Nigeria, Mexico, Russia and all those oil rich countries wasting their new found wealth, and by other energy exporters, like Canada, South Africa, Indonesia, and Australia.
The rapid rise in oil prices is bringing pain, as well as pleasure to many countries, boosting inflation in the US, Europe, Australia, New Zealand and everywhere.
It’s also boosting national income in a way not seen for decades, with Norway, Australia and Canada among the major beneficiaries because of the mix of their exports and the way the boom in commodity prices is boosting export income faster than import prices can rise. Our terms of trade are therefore improving rapidly.
But there is more to run in this story, for various reasons.
Take coal prices, already boosted by China’s withdrawal from the world market after severe weather in January and February left it short of coal. Last week’s big earthquake has left the country even shorter of coal, oil, gas and nuclear power. A total of 32 power plants have had to be closed in China for fears of damage from the quake. That has meant more power has to be generated elsewhere in the country from coal, oil, gas and nuclear stations, meaning China will not be able to export any coal for some time.
And news yesterday emerged from South Africa that the biggest supplier of thermal coal to Europe might start cutting exports to help rebuild dangerously low supplies at the country’s power monopoly.
This is only a plan but it is forcing up the cost of thermal coal on world markets. Australia and Indonesia are the other sources Europe could turn quickly to (as well as Colombia) but Australian supplies are constrained by export port congestion and inadequate infrastructure.
Export coal prices for this year are already doubled and trebled in some cases for coking and thermal coal: the latest news from China and South Africa will see spot prices remain high and get analysts wondering about the spillover into the 2010 year.
The Chinese quake will also mean the country lifts its purchases of diesel fuel to burn in mobile generators which have been sent to the earthquake zone in their hundreds: that boosted the price of heavier oil products, such as home heating oil on the US market.
This is in addition to the rising level of demand from China for oil and other energy forms: the quake will mean those demands are increased noticeably for an indefinite period of time.
All this is helping support the surging oil market which has now decoupled from other commodity markets.
Food prices are easing thanks to expectations of a big world wheat crop and the release of rice stocks in the US, Asia and other major producers; corn prices are weak in the US (but still at high levels) because of good planting conditions and soybean prices are still strong, but not surging. Metals prices have come off a touch, with zinc easing after jumping off the back f the quake.
But it’s oil which is both doing the damage to inflation and the global economy. Since the start of the year oil prices are up 35%, but for those ‘out years’ the price is up around 60%.
Goldman Sachs last week advised its customers to buy oil contracts for 2012 when predicting the price would rise to an average $US141 a barrel later this year and a bit higher into 2009. And the publicity seeking Texas oil personality and investor, T Boone Pickens, got what he was looking for yesterday when he said oil would hit $US150 a barrel by the end of the year.
He made the same forecast in April but was ignored: with the bubble-like conditions for oil now intensifying, his simple repetition of that April forecast spurred the market higher.
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