Crude has a flame to it

February 3, 2015 02:03 PM

There were a number of consolidating periods during the falling price action from June to Thursday. I marked 13 session periods where prices had consolidated before heading again lower. Sometimes the declining price action following the consolidation period was quick and substantial other times more mild. A 13 session period ending last Tuesday appeared to have marked a stall before further price concessions and Wednesday’s price action appeared to follow that script. This false break lower may have prompted a last round of marginal shorts to take positions.

The implications for higher crude prices are too numerous to list completely, and there is not enough space here to discuss them all here. We have been interested in the way bond prices have priced lower oil prices and wondered aloud what implications there would be to rising oil prices. In short, we expect that some of the pricing for bonds takes into consideration a deflationary impact from lower oil prices. Our view is that the ‘oil shock’ is not an inflation event, but odd as may appear to some, slowly rising oil prices from here could in fact be inflationary.

To the extent lower oil prices prompted buying long-dated Treasuries, or global long rates for that matter, there is room for recovering oil price action to have dramatic and opposite effects on bond prices.

Worker strikes may be headline news and some may believe the nature of a bullish advance based on such is fleeting. We would rather recognize a change in momentum and given the extent of the advance over the last days, which now reached $3.00 higher today, we think some weaker shorts may be found and further price gains would follow. Bond prices too may have found a marginal long or two on Friday or before that cannot hold positions into too much more pain, resulting in a dramatic yield jump.

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About the Author

Martin McGuire, managing director at TJM Institutional Services