CIP INVESTMENT MARKET COMMENTARY
Prepared by Peter Collerton, Capital Investment Planning Ltd
May was a mixed month for performance in major equity markets. On the positive side the US’s S&P 500 was up 1.1% and the Japanese Nikkei 225 was up 4.1%. This was one of the best performing markets for the month. On the negative side, the Hong Kong Hang Seng was down -4.8%. European indices were mixed with the German DAX up 2.1%, French CAC up 0.4% but the UK FTSE 100 down -0.6%.
Closer to home the ASX All Ords was up 2.1% and the NZSE 50 was flat for the month.
More disconcerting was the price of oil. It was up strongly with new highs on many occasions during the month. Gold has reached a plateau and actually fell by -2.4% during May.
The Reserve Bank of NZ has left the Official Cash Rate unchanged at 8.25% in its recent statement. The Bank indicated it is now likely to lower the OCR later this year, the timing being much earlier than was indicated in the Bank’s March statement.
The estimates for CPI inflation have been revised up significantly to an alarming 4.7% YoY in the third quarter of this year driven by higher oil prices. The good news is that a significant fall is predicted after this. Near-term GDP forecasts have been slashed, with annual average growth falling to 0.9% in the March 2009 year. The Reserve Bank didn’t go so far as to factor in a technical recession, but the Governor admitted that it was a possibility.
The immediate effect of the bulletin was a weakening NZD and this continued for some time. Interest rates have also been moving around, sending tradable bond prices up and down.
Where are they heading, and where should they be? There are so many varying views that it is difficult to make sense out of all the noise. Headlines like the ones below don’t help. There are mixed messages aplenty.
“Oil to hit $250 a barrel within 18 months, says Gazprom chief”
“Protestors Demand Lower Fuel Prices”
“Saudi Arabia: We have more oil”
“Militants Attack Oil Vessel in Nigeria”
“Opec rejects calls for more oil”
“World G8 energy officals vow to fight soaring fuel prices”
The latest figures from the International Energy Agency on 10 June show that supply and demand are roughly balanced at the moment.
Source IEA – Oil market report
High prices are definitely dampening the demand side of the equation at present. Because of this, the IEA is revising downwards its forecast of demand each month.
Stocks of oil products and distillates are currently running at 53 days‘ supply which is around the normal level for global stocks. So there are no surprises there.
So, given that supply and demand appear to be balanced, it follows that any supply interruption or negative news will put further pressure on prices.
There have been very large flows of “investor” funds into commodity funds and indices in recent times. These funds trade the futures of oil, gas, and other commodities. The inflows are in the billions so all that extra money is trading in what is a finite market. In 2004 there was around USD13 billion in “commodity funds” and, by the end of March, the figure was 20 times that or USD260 billion invested.
Currently there are two schools of thought on the effects. The first is that these funds do not actually buy the end product but trade in the price only, rolling their investments at the future price. Therefore the current spot price is not affected. There are also protective mechanisms in place to stop the spot price from being affected by speculative future trading.
The second school of thought is that the protective mechanisms are not effective and the futures traders have found ways around them creating a speculative bubble. There are various investigations in progress around the world by regulatory bodies and if this school of thought proves to be the problem the open doors will be closed very quickly. To everyone’s relief prices would drop rapidly.
Peak oil is the point in time when the maximum rate of global petroleum production is reached, after which the rate of production enters its terminal decline.
So are we at or near a maximum rate of petroleum production? As can be seen from the chart below it depends on whose estimate you look at. The grey shading is actual oil production and then the various lines are predictions for supply of different types of oil and condensates.
The only real conclusion that can be drawn is that peak oil will be reached in the near future by current forecasts. A further point to bear in mind is the changing perspective for some reserves. If prices stay above $100 per barrel then what were uneconomical deposits and unexplored areas may become economically viable, be counted as possible reserves and ultimately increase supply.
The current price for oil is a function of supply and demand. Speculation may be having an effect and could be causing a bubble, but, all things considered, prices will probably stay high. Peak oil is getting closer given the reserves we know about right now. What remains to be seen is the effect of increased supply.
as at 30 May 2008
|
1 Year |
3 Years |
5 Years |
|
Avg % p.a. |
Avg % p.a. |
Avg % p.a. |
| Inflation (Mar 08) |
3.37 |
2.98 |
2.61 |
| GDP real (Dec 07) |
2.50 |
2.96 |
3.08 |
| Housing (Dec 07) |
8.0 |
12.2 |
18.3 |
|
|
|
|
|
| 6 month Deposit |
8.23 |
7.64 |
7.07 |
| 90 -day Bank Bill |
8.83 |
8.23 |
7.59 |
|
|
1 year ago
|
3 years ago
|
5 years ago
|
| NZD/AUD (rate x years ago) 0.8500 |
0.8885 |
0.9382 |
0.8907 |
| NZD/GBP (rate x years ago) 0.3989 |
0.3692 |
0.3871 |
0.3553 |
| NZD/USD (rate x years ago) 0.7900 |
0.7325 |
0.7191 |
0.5762 |
|
|
|
|
| NZD/AUD (% chg) |
8.5 |
14.6 |
8.8 |
| NZD/GBP (% chg) |
-6.6 |
-2.0 |
-10.1 |
| NZD/USD (% chg) |
-5.7 |
-7.4 |
-25.8 |
|
% return p.a.
|
% return p.a.
|
% return p.a.
|
| NZSX 50 Gross Index |
-15.8 |
6.5 |
n/a |
| ASX All Ords Gross Index NZ$ |
-9.0 |
14.0 |
18.8 |
Hang Seng (Hong Kong) |
18.9
|
25.6
|
31.7
|
|
Nikkei 225 (Japan) |
-19.8 |
9.1 |
14.0 |
| SSE Comp (China) |
-16.5 |
74.6 |
23.6 |
| S&P 500 (USA) |
-8.5 |
5.8 |
9.1 |
| FTSE 100 (UK) |
-8.6 |
7.3 |
9.9 |
| GDAX (Germany) |
-10.0 |
19.7 |
27.6 |
| CAC40 (France) |
-17.9 |
7.2 |
13.5 |
| MSCI World Index NZ$ |
-9.3 |
9.4 |
8.1 |
|
|
% change p.a.
|
% change p.a.
|
% change p.a.
|
| Gold |
38.9 |
39.8 |
32.2 |
| Oil |
88.9 |
62.9 |
81.3 |
Prepared by Peter Collerton, Capital Investment Planning Ltd, June 2008
Capital Investment Planning Ltd, P.O. Box 22238, Christchurch, New Zealand
Phone +64 3 379 1913 Fax +64 3 377 2330
Important Note. This publication may be copied in whole or part provided Capital Investment Planning Ltd is acknowledged as the source. Investment and mortgage rates are indicative only and, whilst correct at the time of publication, are subject to change without notice. Text may be opinion only and should not be seen as a substitute for personal professional advice relative to an individual's personal situation.
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