Changes in Total Global Credit Affect The Oil Price

In some posts on Fractional Flow I have presented some of my explorations of any relations between the oil price, changes to global total credit/debt and interest rates. My objective has been to gain and share some of my insights of how I see the economic undertows that also influences the price formation for crude oil.

I have earlier asserted;

  • Any forecasts of oil (and gas) demand/supplies and oil price trajectories are NOT very helpful if they do not incorporate forecasts for changes to total global credit/debt, interest rates and developments to consumers’/societies’ affordability.

In this post I present results from an analysis of developments to the annual changes in total debt in the private, non financial sector of some Advanced Economies (AE’s), and 5 Emerging Economies (EME’s) from Q1 2000 and as of Q3 2014 with data from the Bank for International Settlements (BIS in Basel, Switzerland).

The AE’s are: Euro area, Japan and the US.

The 5 EME’s are: Brazil, China, India, Indonesia and Thailand which in the post are collectively referred to as “The 5 EME’s”.

Year over year (YOY) changes in total private debt for the analyzed economies were juxtaposed with YOY changes in total petroleum consumption in these based upon data from BP Statistical Review 2014.

  • As the AE’s slowed growth in, and/or deleveraged their total private debt after the Global Financial Crisis (GFC) in 2008/2009, the EME’s continued their strong growth in total private debt and China accelerated it significantly in 2009.
  • The AE’s petroleum consumption declined noticeably as from 2007, resulting from the combination of high oil prices and tepid debt growth and/or deleveraging.
  • The EME’s remained defiant to high oil prices and continued their strong growth in petroleum consumption, which likely was made possible by strong growth in total private debt.
  • Demand remains what the consumers can pay for!

All debts counts, household, corporate, financial and public (both government and local) and exerts an influence on economic performance (GDP, Gross Domestic Product).

A low interest rate allows for growth in total debt and eases services of the growing total debt load.

Figure 01: The chart above shows the developments in the oil price [Brent spot, black line] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy heavily relies upon. The financial system is virtual and thus highly responsive. NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.
Figure 01: The chart above shows the developments in the oil price [Brent spot, black line] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy heavily relies upon. The financial system is virtual and thus highly responsive.
NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.
Continue reading “Changes in Total Global Credit Affect The Oil Price”

The Contango Spread Supports The Oil Price And Results In Strong Stock Building

As analysts and pundits keep staring into their crystal balls searching for clues to future moves in the oil price, it may be more helpful to look at some actual developments that may explain the recent strong US stock builds, developments in US total petroleum consumption and what this now may presage about future oil price movements.

In this post I present a closer look at the recent growth in US total petroleum demands split into:

  • Development in US total petroleum consumption (inclusive some selected products)
  • Rate of stock build of US commercial crude oil stocks

Then a look at developments in crude oil supplies from OPEC where several of the big oil producers in the Middle East have had strong growth in the number of oil rigs since early 2014. Recent media reports about increases in oil supplies from the biggest Middle East oil producer.

Figure 01: The chart above shows developments in the oil price (Brent spot), blue line and left hand scale [The oil price has been multiplied by 4 to fit the scaling on the left hand scale]. The thick black line shows the weekly EIA reported total inventory of US commercial crude oil stocks, left hand scale. The thin gray line plotted versus the right hand scale shows the daily changes to crude oil inventories from weekly EIA data. The thick red line plotted versus the right hand scale is a trailing 28 days moving average of changes to the crude oil inventories. Stock draw downs adds to supplies and may moderate price growth for some time. Figure 02 has zoomed in on the recent developments.
Figure 01: The chart above shows developments in the oil price (Brent spot), blue line and left hand scale [The oil price has been multiplied by 4 to fit the scaling on the left hand scale]. The thick black line shows the weekly EIA reported total inventory of US commercial crude oil stocks, left hand scale.
The thin gray line plotted versus the right hand scale shows the daily changes to crude oil inventories from weekly EIA data.
The thick red line plotted versus the right hand scale is a trailing 28 days moving average of changes to the crude oil inventories.
Stock draw downs adds to supplies and may moderate price growth for some time.
Figure 02 has zoomed in on the recent developments.
In Q1 2014 the average daily US stock build was 0.29 Mb/d and during Q1 2015 the average US daily stock build was 1.10 Mb/d.

Demand for US stock build was up 0.8 Mb/d year over year. This stronger stock build temporarily adds to (global) demand and supports the oil price.

What drives this strong stock build is the price spread between contracts for prompt/front month deliveries versus contracts for later deliveries when the futures curve is in what is referred to as contango, refer also figure 3.

The recent strong builds in US crude oil storage may give away some clues about underlying developments in consumption.

Demand = Consumption + Stock changes = Supplies

Continue reading “The Contango Spread Supports The Oil Price And Results In Strong Stock Building”

The Oil Price, Total Global Debt And Interest Rates

In several posts I have presented my exploration of any relations between total global debt, interest rates and the oil price.

Sometimes I am left with the impression that when societies’ are looking for a scapegoat for its ills, their reactions bring forth memories from a scene of the movie “Casablanca”, where Captain Renault confronted with solving a crime commands his men; “Round up the usual suspects!”.

For many years one of these “usual suspects” has been and will continue to be: The Oil Price.

However, looking at time series of developments in total global debt and interest rates makes me wonder if not more light should have been directed towards developments in total global debt and interest rates to obtain profound understandings of the fundamental forces that drives the oil price through its ebbs and flows.

In the post “It is the Debt, Stupid” from December 2011 (in Norwegian and refer figure 6) I illustrated how much a 1% increase in the interest rate for public debt in some countries equated to as an increase in the oil price (this was admittedly a simplistic and static comparison, and the exercise was intended to draw attention to the level of debts which made many economies more sensitive to interest hikes than to oil price increases).

Starting in 2014 there has been a steady flow of reports, worth studying, that focused on the growth in total global debt levels, like the 84th BIS Annual Report 2013/2014 and VOX CEPR (CEPR; The Centre for Economic Policy Research) with its “Deleveraging, What Deleveraging?”, The 16th Geneva Report on the World Economy.

In February 2015 McKinsey published “Debt and (not much) deleveraging” which also presents some deep insights into developments of debt by sector for some countries.

Figure 1: Chart above has been lifted from page 1 of the Executive summary of the McKinsey report “Debt and (not much) deleveraging” made public in February 2015.
Figure 1: Chart above has been lifted from page 1 of the Executive summary of the McKinsey report “Debt and (not much) deleveraging” made public in February 2015.

The chart above contains plenty of information about total global debt levels, debt and developments to the growth rate of debt by sector and not least, how total global debt has grown faster than Gross Domestic Product (GDP).

The short version is that post the Global Financial Crisis (GFC) of 2008, which was triggered by too much debt, the global economy was brought back on its trajectory by the use of more debt stimulated by low interest rates.

Continue reading “The Oil Price, Total Global Debt And Interest Rates”