As a follow up to our recent post on oil (see post), we were attracted by a leader in The Economist this week (see leader) that contained a couple of interesting facts.
1. It would appear that the commodity futures market now has $260 billion invested in it, and is 20 times the size it was in 2003. This rather supports the view that oil - and other commodities - have started to replace financial instruments and property as the places in which to store one's wealth. The article correctly states that the futures market does not deal in real commodities, but in notional commodities. However, we feel that the belief that the spot market (for real commodities) and the futures market (for nominal commodities) are decoupled is a bit naive. Investors need to resort to the spot markets in order to fulfil their notional contracts when they expire. Our information, from our oil radar contacts, is that this sentiment has been adding to the price of oil.
2. The leader alludes to how the Bush tax rebate to stimulate the economy is being spent on food and fuel. A further article (see article) suggests that as these prices have risen over the past year, more and more Americans are likely to be using the rebate to accommodate the rising cost of necessities and to use it to pay down some of the debt that they have accumulated. There is a very interesting blog that charts how the tax rebates are being spent at http://www.howispentmystimulus.com/. As a window into the lives of ordinary Americans, this is developing into a useful social comment on the times.
We are still of the view that the price of oil has further to rise. From a futures perspective, one might wonder if this is a temporary blip (as The Economist leader suggests), or if it is a harbinger of something more substantial. Are we seeing a weak signal from an emergent future?