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Oil, the Baltic Dry Index and Copper

December 18th, 2014 · Greg Atkinson · 17 Comments

According to the prevailing wisdom of the finance media and it seems most market analysts, the fall in the price of oil has not only been sudden but also unexpected. I suspect much of this has to do with a number of people trying to deflect attention away from their earlier bullish calls and it’s amazing how many market bulls have now morphed into long-term market bears. Unfortunately for them the process has not been a total success and if you look closely, you can still see their horns.

The most surprising aspect about the fall in oil prices has been how severe it has been and also how long it took for it to start reflecting weak global economic growth. Copper for example has been trending downwards since July (and before that 2010) – so it shouldn’t be a shock that eventually oil (and gas) prices were going to be dragged lower especially since a lot of new supply has come on-line.

Now that oil prices have fallen, the finance media is awash with “what if” stories with variety of doom & gloom forecasts. But my suggestion (as always) in such times is to relax, look at the facts and then try and make some calm observations about what has happened.

So let’s start off by looking at the oil price chart.

Crude Oil Price 2009-2014

 

Crude Oil Price Chart Dec 2014

If we ignore the peaks and settle for a current oil price of around $60, then the crude oil price per barrel (in USD) has fallen around 45% recently.  That’s nasty,  but let’s remember that above say $100 oil was a bit pricey anyway so I’d suggest a price around $80 was (and is) reasonable taking into account current global economic conditions.

Therefore I consider what has happened is that the price of oil has corrected from a level which was too high and has now possibly over-corrected to a level which is too low. I would also hasten to add this type of sharp correction also the stock market sometimes and it’s not uncommon for a market (or a stock) to move from being too hot to being oversold in a matter of weeks.

But 40-45% is a huge correction you might say and it came from nowhere without any warning! My reply to that proposition would be…humbug!

I have almost lost count of the times I have mentioned the Baltic Dry Index (BDI) and warned investors to take note of its weakness as it was a sign that all was not well with the global economy. Yes there has been and is still, an oversupply of ships that carry bulk dry goods – but with the Baltic Dry Index down -60% this year this is an indicator that is almost screaming that global economic growth is stalling.

Of course you probably haven’t heard much about this from the business & finance “experts” in the Australian mainstream media. This is largely because they don’t venture much past RBA media releases, excitable comments about house prices and some lazy analysis of the stock market which seems focused on stocks they hold in their superannuation funds.

But as I have stressed on a few occasions, the Baltic Dry Index is a much misunderstood and maligned economic indicator but is definitely worth watching!

Having said that, the BDI can be a pretty erratic index to follow as shown by the chart below.

Baltic Dry Index 3 Year Chart

Baltic Dry Index 3 Year Chart - Dec 2014

I generally look at the BDI in one or two year blocks and filter out any short term peaks and troughs. So as it stands now the trend over the 12 months has certainly been downwards and looking forward, I don’t see much that makes me all that optimistic either. My guess at this stage is that the BDI will find a short term bottom yet again and probably be on the rise early in 2015. At that point it will be time to see if it can clear and remain above the 1,000 mark.

Copper on the hand is generally a widely watched economic indicator but it seems to have been overlooked during the last few weeks as oil stole the show.

Spot Copper Prices 6 Month Chart Dec 2014

Clearly the copper price hasn’t been hit as hard as oil recently, but it is down more than 30% from a high it reached in early 2010. Therefore we could conclude that copper has effectively already undergone a price correction.

Other commodities such as LNG and coal have also undergone price corrections so realistically was it a surprise that the price of oil also fell? I don’t think so.

So rather than panicking or starting to contemplate the long term consequences of oil at say at $20 a barrel, I instead expect that the oil price will soon find a bottom (it may already have) and then start to recover in early 2015.

Yes the severity of the price correction was a surprise, but not the fact that the price itself corrected.  As evidence mounts that Chinese economic growth is probably slowing quicker than expected then prices for many commodities are likely to come under continued pressure in the months ahead.

This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Sydney but now works and resides in Japan. He can be followed on twitter via GregAtkinson_jp


17 responses so far ↓

  • 1 lachlan // Dec 23, 2014 at 4:39 pm

    Back in 2009/10 there were predictions for oil to go to 200 or even 300 dollars by now. The reasons given were a possible reserve currency failure, the increasing demand from emerging markets and the effects of peak oil. That sounded like a reasonable argument and at some stage i guess we’ll have oil shocks again like in the past. I am sure oil has to remain a good inflation hedge. Anyhow it may be possible to explain to some degree the action between then and now as a mixture of upward pressure by those emerging markets plus wall st speculative schemes followed by this shakeout after a fall out of those schemes, deflationary pressure from the struggling global economies and whatever else .
    But for now surely we are too cheap down at these prices. I didn’t feel over taxed on oil at the pump when it was a 1.10. Greg its a lucky break for over indebted economies to eh? Maybe too some quality oil stocks would be a good thing some time. I’ll have to take a look later.

  • 2 lachlan // Dec 23, 2014 at 4:49 pm

    ” struggling global economies”
    ha ha, mars and venus in recession too 🙂

  • 3 Stillgotshoeson // Dec 23, 2014 at 9:42 pm

    I vaguely remember someone predicting oil at $20 a barrel a few years ago.

  • 4 Greg Atkinson // Dec 24, 2014 at 4:59 pm

    Often with commodities it seems much of the discussion is focused on the demand side only and often it is forgotten that as prices rise there is a rush sometimes akin to stampede to bring on extra supply.

    Now there seems to be a little too much oil slushing around but even so, I doubt it will trade at $20 for long – if it ever gets that low that is. (although it did during the dark days of the GFC)

    Is it good news for indebted countries? Maybe..but not for those exporting oil or LNG. (like Australia for example)

    For now I reckon the markets are in a spin and are probably under-pricing oil, over pricing US stocks and still not fully taking into account the slowdown in GDP growth in China.

    P.S. Both Rio Tinto & BHP Billiton look interesting at the moment if you are willing to wait a few years to post a decent return.

  • 5 lachlan // Dec 25, 2014 at 5:43 am

    In Oz you could predict that mortgages are easier to service when oil is low since petrol may become cheaper. However like getting an interest rate discount we also would get problems. The net effect of oil price on an economy is a more complex calculation and may draw in considerations like exchange rates etc.

    Some of the old oilers on my list were AWE and WOR which are taking a big hit. At some stage soon the discount shoppers will move in. Not sure how these particular companies are going on the ground these days.

  • 6 Greg Atkinson // Dec 25, 2014 at 10:02 am

    Sadly for me AWE is already in my basket so I am hoping for a rebound or I may tempt fate and pick up some more while the price is down.

    P.S. Merry Christmas!

  • 7 lachlan // Dec 25, 2014 at 12:36 pm

    Thanks for your time through the year Greg, I’m hoping next years events give us all a mile of excitement and plenty to analyse here. Merry Christmas to you and Shoes…not sure what happens there in Japan though. Enjoy your time out with kids BP (if your out there in the web somewhere). Just myself my trusty K9 and the bovine mates around here today but I’ll be having my time with the kids and other family tomorrow…starting with an early dip on the open beaches south of Noosa…the lucky country eh!

  • 8 Stillgotshoeson // Dec 29, 2014 at 10:56 am

    Hoping everyone had a great Christmas and that 2015 is a Happy New Year to all

  • 9 Greg Atkinson // Dec 30, 2014 at 10:12 am

    Thanks Lachlan. It looks like this year is going to see the ASX 200/ASX All Ords both end the year around where they started or up around 100 points which is basically the same anyway.

    I hope you had a Merry Christmas and all the best for 2015!

  • 10 Richard // Dec 31, 2014 at 4:26 pm

    Okay now we need predictions for end of 2015.

  • 11 lachlan // Jan 1, 2015 at 9:08 am

    a big finish for the USDX last year @ 90.28

  • 12 Biker // Jan 1, 2015 at 6:29 pm

    What a great year! As predicted, Mr Abbott and Mr Hockey saved us from ruin, so 2015 should see Australia surge ahead once again. May all our gambles pay off, resulting in financial independence for one and all!~

    Hope you had a great Christmas, Lachlan. Enjoy the Noosa beaches. We had quite a beach party ourselves, on Christmas Day. We certainly are the lucky country!~

    Biker
    Out (t)here somewhere… 🙂

  • 13 Greg Atkinson // Jan 7, 2015 at 5:50 pm

    Yes Richard it is time for the end of 2015 predictions. I am going to write mine up in a few days and unless something changes I don’t expect the market to finish above 6000 which means yet another year below the pre-GFC high of just over 6500.

  • 14 Greg Atkinson // Jan 15, 2015 at 12:38 pm

    By the way when BHP shares are trading down near $26 then I am a buyer (albeit a small one). I think the commodities correction/rout is probably now entering the over sold/panic zone and my wager is that in few years time BHP shares will be well clear of $30.

    This is certainly not investment advice by the way and probably means the BHP share price will now keep falling 😉

  • 15 Matthew // Jan 15, 2015 at 9:09 pm

    Happy New Year Greg, been reading most of 2014 but far to busy to post.

    Re BHP I have my eye on $22 personally. I agree with you entirely regarding the nearing of the panic zone for commodities, but it may create good buying.

    As the old saying goes though never bet more than you can afford to lose!

    As for the 2015 predictions, you know my fondness for this game! I think 2015 will be very interesting indeed and have some thoughts I am happy to test once yours are up!

  • 16 Ned S // Jan 30, 2015 at 7:51 am

    The BDI is having a little rest again.

  • 17 Greg Atkinson // Jan 30, 2015 at 8:47 am

    Yes quite a rest Ned. Down at 2008 levels and might go below 600!

    As I have been saying for years, the BDI is worth watching. It took a dive before the commodities rout and so proved yet again to be a leading indicator even if it is hard to follow at times.

    Next major correction: US stocks?

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