Oil price swings shatter market myths
Oil prices dropped to five-week lows and stock markets around the world gained ground following the re-election of US President Bush.
These movements in commodity prices and equity values do not herald a brighter economic future, however. Instead they only debunk some of the normalised economic theories about the relationship between prices, “terrorism” and politics.
We are repeatedly told by analysts, traders, politicians and oil producers that the world is paying a “terror premium” on the price of crude oil. Prices bandied about range from $5 to $15 a barrel extra because of the threat of “terrorism”.
That centre of that threat of “terror” is generally accepted as being inside Iraq. Notably attacks on pipelines. It is those attacks, we have been told, that are contributing such a significant slice to the price rises in oil.
This theory also works during election campaigns, or so we are led to believe. Yet almost unnoticed in the media, the exact opposite has been happening.
Rash of attacks
Only a few days passed between record highs at $56 a barrel and the post-election prices of around $48.50. One would think that there had been the removal of at least part of the “terror premium”.
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There is no let-up in attacks on |
But as the oil price began its most recent fall on 1 November, what was happening went against received wisdom.
On that same day there was an explosion on the Kirkuk-Ceyhan oil pipeline near Riyad, south-west of Kirkuk. There was also an attack on another pipeline feeding into the Kirkuk-Ceyhan supply route coming from the Bai Hassam oilfield in Qushqaya. Then there was also an explosion at a pipeline near the Khabbaz oilfield, also to the south of Kirkuk.
The next day, as prices continued to fall and Americans voted, little changed. Two devices blew up a pipeline connecting Kirkuk oil fields to a refinery in Bayji.
Messy situation
Then there was another explosion at a refined products pipeline in Hatin north of Kirkuk. Then there was also an attack on a “pipeline network” which connects the Khubbaz oil fields west of Kirkuk with refineries in Bayji and Baghdad.
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“The market is Frederic Lassere, |
To round it all off, on 3 November, as John Kerry conceded defeat, some unknown assailants killed the director-general of the Iraqi oil ministry’s oil byproducts distribution company, Husayn Ali al-Fattal. His killers knew where he lived, in the Yarmuk area of Baghdad, shooting him as he left home to go to work.
“But the market is not focusing on the situation in Iraq right now, even though it is pretty messy,” says analyst Frederic Lasserre of Societe Generale in Paris.
“Around the election a lot of the big hedge funds were uncertain of what would happen, so they started to sell. They felt that if Kerry won it would have a bearish (lowering) effect on prices. We have also seen a big build in US stocks, that also helped.”
Cold winter blues
But although the market has dismissed pipeline attacks and assassination, the fundamentals will last longer than any election sell-off.
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The markets are happy the US |
“If we have a cold winter, and everyone is looking at temperatures, then we are going to have a problem,” continues Lasserre. “I would not be surprised to see a rebound, I’m not sure that we have seen all the highs just yet.”
So, the “terror premium” is not a constant in the market. Remember that the next time you hear a politician invoking it. The price of “terror” is in fact a matter of choice for the traders.
“That is right,” says Lasserre. “The attention of the market is stocks, refineries and the winter temperature. The situation in Iraq is not a big change.”
This is reflected in both commodities and equities. First, the Dow Jones Index shot up 280 points in two days, rallying from lows of 9800 a week before the election to 10300.
In general the markets are pleased that the US presidential race did not end up in the courts. They are pleased at the lack of uncertainty and they may also be pleased at the promise of more tax cuts to come.
Resurgent markets
The fall in oil prices and the rise in the markets were symbiotic. They both helped each other. Markets rise because of oil price falls, oil prices fall as the markets rise.
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“There could be a significant further deterioration in already massive US current-account and trade deficits. That would only exacerbate America’s problematic dollar-interest-rate conundrum, posing a huge risk to financial markets” Stephen Roach,Morgan Stanley |
Also, alongside this, the dollar quietly fell to within its all-time lows against the euro. This too pleases the markets who see a weak dollar as necessary to underpin US economic “growth”.
But the weak US economic fundamentals are still the same: low job growth, record deficits and public debt, an absence of savings coupled with economic growth based around huge government spending, the sale of debt and tax cuts.
Stephen Roach of Morgan Stanley is pessimistic about the forthcoming Bush term, from an economic standpoint. “There is the distinct possibility that the whole experiment will backfire,” he says.
“There could be a significant further deterioration in already massive US current-account and trade deficits. That would only exacerbate America’s problematic dollar-interest-rate conundrum, posing a huge risk to financial markets.”
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The theory of a ‘terror premium’ |
Uncomfortable position
With a continuation of current US economic policy, Roach says that “the US is implicitly sending a very strong message to the rest of the world that it has no choice other than to go along for the ride.
“That puts Asia and Europe in the uncomfortable position of perpetuating their subservient position as suppliers of goods, services, and capital to saving-short Americans.
According to Roach, “In the years immediately ahead, the United States will be asking more and more of the rest of the global economy to keep America’s magic alive.”
After the post-election euphoria has died down, they may find the rest of the world is not as willing as they might like.