The head of Germany’s financial regulator is warning that US subprime mortgage problems may be about to lead to the worst banking crisis since 1931. Yesterday, WTI crude broke through its 1980’s highs to hit a new all-time record price of $78.77/bbl, and looks poised to push on past $80/bbl. And adding to the sense of ‘retro’ is the news that debt traders have revived the 1980’s children’s TV show ‘Teenage Mutant Ninja Turtles’ as an acronym. NINJA now stands for No INcome, Job or Assets
WTI has risen strongly in recent weeks. Its price had been held back by major refinery maintenance in the Cushing area, which led to oil storage problems and put pressure on prices. At one point, Brent was trading at a several dollar premium to WTI as a result, compared to its normal $1/bbl discount. Even today, Brent and WTI are only at parity, so it still has some ground to make up.
In ‘What price oil’ on 5 July, I referred to the CGES analysis of oil market supply/demand, and suggested that markets were wrong to be focusing on apparently healthy US crude stocks. The real issue, apart from the stock problems at Cushing (where the WTI benchmark is located), was the lack of sufficient OPEC supply as we move into the peak winter demand months.
It seems that markets now accept this analysis. At the time of writing, WTI stood at $71.41/bbl, so it has risen just over 10% since I made the call. And OPEC seems steadfast in its refusal to consider any increase in production, with its current President suggesting earlier this week that there was no reason even to put the subject on the agenda for September’s Ministerial meeting.
So it looks as though oil and gasoline prices will stay high as we move into autumn. This will increase inflationary pressures, as last year oil prices declined significantly in the second half of the year (prompting OPEC’s caution now), and so the comparison by December will be against $55/bbl crude. Equally, the European heat wave and the UK floods, plus the US drive to use corn for gasoline, are already pushing up food prices.
At the same time, more NINJA’s now seem to be appearing outside the USA, unable to pay their debts. I was astonished to learn from today’s Financial Times that Jochen Sanio, head of Germany’s financial regulator, has ‘warned of the worst banking crisis since 1931’. I do not know Herr Sanio, but I assume that a man in his position is not normally given to hyperbole. His comments are certainly in line with the potential problems identified by the world’s central bank, which were discussed here a month ago in '4 risks to the world economy'.
Rising oil and inflation, plus weakening US demand and credit markets, sounds to me like a distinctly unhealthy cocktail of events. And if Herr Sanio is remotely right in his analysis, then a lot more NINJA’s will be turning turtle over the coming months. This would not be good for chemical company profits, or their stock market values.