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Monday, 18 December 2017

On oil, gas and inflation

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It may not make headline news – it only ever does when it makes new highs – but oil is trading fairly cheaply. However, when talk is of oil, it is very rare that those involved declare “which” oil they are on about.

Anthony Peters, SwissInvest Strategist

As of last night’s close, the June 12 Brent future was marked at US$118.78, its lowest since February 20th whereas the June WTI contract settled at US$104.64, up a few dollars from its April 10th low of US$101.65. Irrespective, Brent peaked in March as US$125.00 and WTI a few weeks earlier at US$110.50 while prices at the pumps are still heading in one direction only.

In the last twelve months alone, the spread between Brent and WTI alone has ranged between US$21.50 at its widest and US$6.07 at its tightest. That aside, there is very little consistency when it comes to reporting oil prices so the press was full of the US$125 barrel one day and then telling us the next that it was nearly back to US$100. I suppose that in a way it was true.

However, if we feel bad about the way fuel pump prices – let alone heating oil deliveries – are not relating to global markets spare a thought for domestic gas users. Natural gas was floating around US$10/MMBtu as recently as June 2008 when Brent was at US$138 pbb. Oil is now around 14% lower but gas is down by 81%.

The sharp decline in natural gas prices should spell good news for somebody but so far as I can tell, it does not – or at least not at a domestic level.

It is no secret that this is largely due to the development of shale gas deposits in the United States through hydraulic fracturing or fracking which remains controversial but which has led to the persistent decline in wholesale natural gas prices on the global markets. The decline in gas prices versus the continued strength in oil prices makes something of a mockery of many of the energy cost arguments – in fact domestic gas prices here in the UK appear to have risen faster than either oil or electricity according to figures I found published by the government department responsible.

Why am I on about this? We spend a huge amount of time reading into commodity prices in order to find some indicator as to a.) the strength of the global economy and b.) the outlook for inflation going forward. The sharp decline in natural gas prices should spell good news for somebody but so far as I can tell, it does not – or at least not at a domestic level.

Inflation is altogether becoming something of an elusive beast. UK RPI and CPI were reported yesterday within the range but a tad higher than forecast at 3.6% and 3.5% respectively. The Bank of England finds itself in an invidious position with both inflation measures remaining stubbornly high but with its hands tied with respect to interest rate policy.

Low interest in compensation

Into this blunders a parliamentary committee which has come up with some hare-brained idea that QE has depressed interest rates and that therefore pensioners who find that annuity rates have become unattractive should be compensated.                   

I happen to have been an investor in Equitable Life (anyone remember that fiasco?) which was swept away by 10% guaranteed annuities when it found that falling inflation and declining interest rates made these unachievable but that had its attempt to renegotiate the 10% guarantee blocked by the courts. That wiped out tens, if not hundreds of thousands, of Equitable clients and I have more than enough friends who lost very significant parts of their pension pots in the process.

There was a case raised at the time which blamed the regulator for not recognising the budding problem and something of a compensation pool was established. However, to suggest that the Bank of England should be called upon to somehow compensate savers for the low interest rates, which its attempts to stop the entire economy from falling off a cliff have brought about, makes me wonder.

I would have thought that by now our politicos would have worked out the most of the mess we find ourselves in is due to them chasing blindly after populist and vote-winning fiscal policies. Had they not felt so utterly compelled to persistently give away money they did not have and which they now find hard to take back – a bit like telling a child that the chocolate bar you gave it and which it has already tucked in to wasn’t really supposed to for the child in the first place – we would not be looking at near-zero rate policies now. Why does reality seem to be such a difficult concept for them to understand?

Meanwhile… we had a decent Spanish bills auction on Tuesday thanks to well set-up dealers’ books and hope will be for more of the same in the bonds today. Between one and the other, it was all “risk on” again. Let’s see how long it lasts this time.

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