There has been a huge amount of economic data pouring out in the last two weeks, all the while in the face of news of increasing violence in the Ukraine, Jordan, and the Middle East.
Domestically, we seem to be in a situation negative total inflation – the Fed will be on hold until December delaying any further interest rate decisions. It seems the global economy will pick up by the end of the year, and there is some growth in the US for the next little while. The biggest worry in global markets at the moment is around oil and commodities.
My discussions with experts lead me to people that people are very concerned about the wild swings in commodity prices, and there are a lot of people thinking about hedging. This is coming from buyers who have exposure on the spend side, who have seen commodities fall, but are hoping to be able to manage that risk in the next 3-6 months. Prices dropping aren’t always a good thing, because people then factor them into their contracts, hoping they will stay low – which they don’t always do.
By the end of the year those electing to hedge are hoping to hedge out 25% of next years risk into the second half of 2016. The other big discussion is around oil. Oil dropped to the mid-40’s, and in 50’s, and was back into the 40’s, and on Friday was about 51-52. Brent is at 58 or $15 off the bottom and there is lots of exposure. People are asking the question “Should I hedge or is there another possibility it could go down even further?” And consumers are asking – this bounce looks real, and are we off the bottom now?
The focused challenge for everyone on oil is whether are we at the bottom. Most certainly we are close to it, but we could be. Oil could certainly drop further, but one thing is for sure – it will definitely rebound and go back up in the next 16-20 months off . Why you ask? The US is having record levels of sales of SUV’s and trucks this year. And the Chinese are also buying lots of cars. The demand for oil is not about to drop any time soon! And the ominous sounds of violence are always a threat to distribution and market channels, which is always a predictor of oil price increases. So those counting for a period of extended low prices in oil should enjoy it while they can, as what comes down…..will eventually come back up.