Today’s Blog – Thursday 23rd June 2016

Please pass this blog onto others who may like to read it

Today we only have time for a flash-blog


We have occasionally asked the question “why did no-one do the The Big Short on the oil price collapse?” – of the many thousands of hedge funds on the planet it seems to defy belief that (at one end of the distribution curve anyway) someone would have made billions from this very large price move in the world’s most important and widely traded commodity.

Reasons why might include the very poor data quality available on global crude market compared to what was available on sub-prime US debt.

However, upon reflection we have developed a new theory on this question.  The very few (but now very rich) people who made money on sub-prime collapsing were by nature pessimists (or in this case, realists).

However, in US$100 oil markets, the pessimists (ourselves included) believed this number represented a reflection of oil production reaching economically viable limits (to define “peak oil”).  The optimists naturally thought “hey we are making great money at US$100”.

So it needed a particularly rare type of optimist to short the oil market – i.e. one who considered oil to be far more abundant than the rest of the market though.  But psychologically such types are highly averse to shorting – they are natural long investors.

Commodity prices

Today’s Brexit vote overhangs everything just now and markets are likely to be pretty much parked for the day. Exit polling could affect the US market later.

Crude did fall overnight by ~2%, with both indices falling below US$50.  Brent closed at US$49.88 and WTI at US$49.13.

The weekly EIA inventory report was disappointing – although we had a sixth week in a row of inventory declines – the quantum was a less than forecast 0.9 mmbbls.  Adding to the poor picture was a product build of 0.6 mmbbls of gasoline and 0.2 mmbbls of distillate.

Henry Hub took some profits off the table, closing down 3% at US$2.68.

LNG and international gas

Today Russian news service Interfax published a new take on threats to the Chinese gas market – the ongoing development of the PRC’s ultra high voltage (UHV) electricity transmission network.  This is increasingly taking electricity over long distances from the likes of Inner Mongolia to Beijing – accessing the more remote region’s cheap renewable and coal fired power resources.

Interfax considers that this is crimping demand for gas-fired generation on the coast – and hence is another overhang on LNG markets.

Plans to expand the UHV network beyond the PRC’s borders to Mongolia (with very large renewable and cheap coal resources) and even Russia and the Stans, could in the long term exacerbate this threat.

Quote of the day

From Michael Lewis’ The Big Short:

“A smaller number of people – more than ten, fewer than twenty – made a straightforward bet against the entire multi-trillion subprime mortgage market, and by extension, the global financial system.  In and of itself it was a remarkable fact: the catastrophe was forseeable, yet only a handful noticed.”


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