So, with recent turmoil in the subprime markets, most of the fixed income markets such as commodities market for Oil, Gold, Natural Gas Futures have all seen lot of volatility and trading. With Oil & Gold rising to historic high levels. Today, in a discussion with a trader from Citi, we were discussing/speculating if Oil would continue to go higher due to impact from Sub-Prime?? I argued against it, and speculated that Oil Prices are no longer that closely coupled with US markets, due to huge demands driven by China and India, and also the impact of sub-prime, is slowly getting un-covered and financial losses of companies such as Citi are much lower than what markets predicted, therefore US economy will not head into recession, and thus impact on Oil Prices would be low bringing them back to normal 65-70$ levels. Some experts will also argue in the other direction, and say that because sub-prime markets will continue to be a problem, and thus short term investors will hedge their investments by investing in Oil(same as Gold). What do you guys think? Oil a Buy or a Sell in the futures market?? Only time will tell the answer, but for now I am voting for lower oil prices in near future (1-2 months).
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4 comments:
Subprime mortgage sector made financial institutions in the United States and Europe to post losses on mortgage investments. Right?
Fundamental problem is shortage of cash liquidity, assets and liquidity goes in a beam balance. With dollar value going down, and gold value collapsing, is not very good for energy sector.
I am hoping, as winters are approaching too, demand will be down too… and to be very frank, fundamental controller is demand and supply then anything else.
Therefore, answer is it will go further down in coming months.
By the way, as a side note, sub prime rate might have gone down, but fixed mortgage rates went up last week. Housing market is not as bad as much it was expected. I think in my personal opinion, I feel all this happened in the hype of a cyclic recession. In other words, we are not doing as bad as we thought we are…
I don’t know if the subprime turmoil has any affect on oil prices or not, if anything it should cause oil prices to go down by curbing demand, but I think that Oil prices are not going to go down until it touches $100. The reason for that is two fold declining dollar, and the other reason is that we are use to these high prices, there is no public uproar as there was 2 years ago when oil prices reached $78 during hurricane Katrina, there were congressional hearings summoning Oil Executives to explain the reason behind high oil prices. Now, we are at $83 and everything is ho-hum, nobody is complaining. In the end, I do believe that in the long run supply and demand is ultimately what affects the price of oil, but in the short term human psychology, and the way we perceive things and adjust to the high prices is an important factor.
Well, I think Sub prime and Oil prices are related, eventhough they are not related in fundamentals, its the human emotions and investors hedging against inflation by investing in Oil. So my prediction that Oil prices will head south, has been proven wrong anyways since I last wrote the article, but well I still believe that in next 1-2 months these prices should get a correction.
On Vinay's point about shortage of cash liquidity, I would say from what I understand and that is there is lot of cash lying around with banks, but no one wants to lend to each other, because of un-certainty to the sub prime exposure. In other words, markets have created a liquidity trap, where we have cash, but no one wants to spend it, which in short term impacts genuine businesses and corporation who needs money to run the business.
Hike in fixed mortgage rates is very interesting point that you brought up. Well no one really knows what the real reason for the hike is some of the speculations are like inflation, because housing is the only sector which is shielded from inflation, and thus people invest in houses in troubled times like these. The other connection is the link between sub-prime and fixed rate mortgages as well, because with Sub-prime owners who are still not hit by the rates, are moving fast in the market to convert their mortgage from ARM to Fixed rate mortgage, to avoid any hikes in interest rates.
Thus, demand for fixed rate mortgages at this instant is higher, and therefore lead the rally to higher interest rates.
(Just on a side note for me, it seems I can relate any market issues/movements with Sub Prime, or at least we got guinea pig we can blame)
Oil is going up man ??
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