Tuesday, April 19, 2016

Oil Momentum?

Some, but not a lot of evidence to suggest oil can break out of current pricing period, especially given political risk to the downside.

Price vs Price-Low Price (as a % of Price) in graph 1.  In graph 2, momentum of high vs low. In graph 3, 90 day cumulative momentum vs, current pricing period vs outright price.

Thursday, March 17, 2016

Oil Shocks and Transmission to the Macroeconomy of a Small Producing Nation.

1.          D= Global Demand
2.          S= Global Supply (Cost Curve)
3.          IR= World Interest Rate
4.          Toil = Traded Price on the Futures Market
5.          Poil= Fundamental Price (Supply Demand /Equilibrium)
6.          Toil-Poil=Commodity Risk Premium
7.          Toil1-Toil2= Total Price Shock
8.          FC= Futures Curve (Oil)
9.          Short Dated Curve: f(Commodity Price Risk)+ f(Physical Equilibrium)
10.       Long Dated Curve: f(Physical Equilibrium)+(f(-1)(Real IR)f( Average Marginal Cost of New Supply))

Example as Shown due to a supply shock causing price decline:
1.      Global  Supply Curve Shifts Right
2.      Global  Price of Oil Declines
3.       Futures curve moves from backwardation to contango
4.       Short Term Commodity Risk flips (positive risk to negative price risk and lengthens to due political risk of shock)
5.       Low Oil Prices Increase Global (Y) and over time expected inflation rate (C)
6.       World Real Interest Rates Rise from IR1 to IR2 as economy improves (exogenous, policy)
7.      Small Producing Nation keeps domestic interest rate at Real IR1 (exogenous, policy)
8.      Producing country experiences increased Net Capital Outflows
9.      Real Exchange rate depreciation in producing country
10.  IS-LM cycle

Classic Macroeconomic Constraints:
Nominal IR = Real IR+ Expected Inflation Rate
S= (X-M)-(Tax-TR-G)+I=National Savings


 A model I have been thinking about lately...since our 20 month commodity slide.