Publications: Notes at the Margin

Tipping Points (September 23, 2013)


In this week's issue, we focus on three tipping points related to energy. First, we address world oil prices. Saudi Arabia has traditionally acted as the world arbiter of the desirable oil price. We suggest that global oil markets may be reaching a tipping point that, if passed, will ultimately lead to much lower prices. Such an outcome could have unhappy consequences for Saudi Arabia, Russia, and other countries that rely heavily on petroleum revenues.


Second, we ask whether US natural gas markets have reached a tipping point. Historically, traders have focused on inventory data reported by the Energy Information Administration as an indicator of future price direction. This gauge may now be less reliable due to the surge in natural gas production from unconventional sources.


Finally, we note that Clive Capital, a major commodity trading hedge fund, will close at the end of the month. The firm’s demise may mark the end of commodities as an alternative investment. This shift, together with pending US banking regulation of commodity trading activities, could remove a significant portion of longs in the market and boost backwardation. The consequence would be lower inventories and more volatile prices.


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