Commodities & Currencies

(Houston)

We must admit we feel a bit vindicated today. We have been talking negatively about the oil market for some weeks, pointing out that OPEC’s cuts would not be enough to raise oil prices. The market appears to have adopted the same position, as despite OPEC announcing a 9-month renewal of its output cuts, oil prices dropped significantly yesterday. Traders were disappointed by the cuts, and don’t seem to believe they will be enough to reduce market supply on a level which will raise prices. Following OPEC’s announcement, oil plunged a whopping ~5%.


FINSUM: We are very pleased that oil traders seem to have realized that OPEC does not have enough power to curtail global production. We think oil will stay below $60 for some time to come.

Source: Wall Street Journal

(Houston)

The oil world has been turned upside down in recent years. The US shale oil industry has completely ended OPEC’s stranglehold on global oil production and has proved a thorn in the side of the cartel. Since OPEC hiked last autumn, US shale has done nothing but boost production, giving all the gains to the US at the expense of shrinking revenue to OPEC producers. OPEC had thought it would be able to put shale out of business when it let prices sink, but it was really competing not just against wildcatters in the middle of the US, but against Wall Street’s financing machine. The outcome has been clear—the US and its shale industry have been the big beneficiary, while OPEC has been the loser.


FINSUM: Oil has been a great example of how free market capitalism and competition can bring prices down. OPEC, and no one for that matter, can control shale output as a whole, a fact which has kept prices down.

Source: Wall Street Journal

(New York)

“The trend is your friend” is a common saying in finance, and Goldman seems to have taken it to heart in its new report. The bank has analyzed whether the strategy is applicable for commodities investing, and it has found that with some caveats, it is. “Commodities in persistent contango benefit the most from trend-following by avoiding the negative carry”, says Goldman Sachs, noting that cotton, zinc, heating oil, gold, wheat and crude oil are among the commodities that benefit from a momentum-based approach.


FINSUM: The difficulty with commodities investing is the storage and/or roll-over issue, either of which creates a significant cost of carry for investors.

Source: Bloomberg

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