June 11, 2009 by Allen
Oil prices continue to rise, crossing the $72 a barrel mark. The current rise is attributed to the sharp fall in crude oil inventories reported by both the American Petroleum Institute and the Energy Department in contrast to expectations for a small increase. The International Energy Agency has raised its forecast for global oil demand saying that it believes the fall in consumption is ending. This echoes comments from the U.S. Energy Information Administration’s revised forecast. Yesterday China reported that auto sales in May rose 34% to 1.12 million units. This rise mirror’s the May 34% fall in domestic auto sales. Investors have jumped on the train that China’s sales are another “green shoot” in the economic recovery scenario
A story in today’s New York Times discusses the stockpiling of commodities by China that has contributed to the rise in global commodity prices and shipping prices (Baltic Dry Index) that are other “green shoots” latched onto by investors and economists. After rising dramatically for much of this year, the BDI has started to slump and ship owners point to sharply lower future prices for ships than current prices. These ship owners suggest we may be in the middle of a bubble of both commodity prices and shipping rates. Current charter rates are around $58,000 a day, but the same ship in 2010 or 2011 can be had for $24,000. It sounds like the reverse of the arbitration trade for crude oil when people could buy the near-month price, sell the oil for future delivery, pay for the storage cost and make a 30% return on their investment. In this case, its charging more for transportation because the client can save a lot by buying cheap commodities today that it may need in the future when prices will be higher, even if shipping costs are lower.
If we are in a bubble that might pop soon, the stock and commodity markets will be rocked to the downside.
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