Another chance to sell oil futures

Two weeks ago, when oil was at $84,  I recommended  to sell oil futures before oil price falls to $79 and even lower. After this recommendation, oil actually fell down to $76 and could bring a 10% return. Today, oil is approaching $83, as we predicted five days ago. Therefore, a good time to sell oil futures is coming again. Below I reproduce some details of the model predicting oil price.

In May 2011, we predicted oil (WTI) price to fall to the level of $70 per barrel by the end of 2011. This is a monthly revision for September 2011. We consider the average oil price of $84 per barrel what is equivalent to the producer price index of 244 in September. (Actual estimate will be published by the Bureau of Labor Statistics in the middle of October.)
        Figure 1 compares our prediction with actual oil price in 2011. In August 2011, the predicted price is a bit higher than the measured one. In any case, we expect the price to fall by approximately $5 per month to the level of ~$70 in December 2011. We also expect the price to slowly fall through 2016 and put the uncertainty bounds for the long-term trend in oil price. The level of oil price in 2016 is between $30 and $60 per barrel. These bounds are also shown in Figure 1.

       

This part is the prediction of the current growth in oil price given days ago.

 A week ago, when oil price was at ~$79 per barrel, we recommended buying oil futures. The intuition behind this idea was that $79 is approximately $5 below the expected price for September. This is a disequilibrium which should be recovered in the short run. Today, oil price is at the level of ~84. This is the equilibrium level for September. A small hike in oil price is possible during the next few days. However, at a two-week horizon, oil price should fall again. Therefore, I recommend selling now and buying in approximately two weeks or when the price will be around $75. It will grow to the level of ~$82 to $85 in October or November.

Figure 1. Oil price prediction in 2011. The price is expected to fall by $5 per month between June and December 2011. The price level is ~$70 in December 2011. We also show the range of expected price evolution by 2016.

Disappointing Bernanke

Federal Reserve Chairman Ben Shalom Bernanke made several important statements in testimony to Congress's Joint Economic Committee that the Fed. In essence, they show the  impotence of economic theory and thus economic authorities basing their policies on wrong understanding. Several examples:
1. “.. Recent revisions of government economic data show the recession as having been even deeper, and the recovery weaker, than previously estimated; indeed, by the second quarter of this year--the latest quarter for which official estimates are available--aggregate output in the United States still had not returned to the level that it had attained before the crisis.”

Any economics, financial or monetary policy should include some expected level of uncertainty in real time measurements such as real GDP and inflation (the GDP deflator). If it is always a surprise, how can one build a reasonable response and policy? One should never characterize an economy with one number without uncertainty. It contradicts scientific methodology.

2. “Slow economic growth has in turn led to slow rates of increase in jobs and household incomes.”

This statement presumes that there can be a situation when slow growth may lead to higher rates of increase in jobs and incomes. Actually, all these processes are equivalent and no one leads to another. They coexist.

3. “ Consumer behavior has both reflected and contributed to the slow pace of recovery.”

This statement is beyond any understanding. Consumers are treated as a black box without any rules how “garbage in” is converted into “garbage out”. This is a typical economic statement which explains every deviation in real economic growth as consumer behavior expressed in demand/supply shocks. Nobody knows what drives these shocks and why the economy runs away from the balance. In a way, this explanation creates a malice loop without start and end.

4. “Other sectors of the economy are also contributing to the slower-than-expected rate of expansion. The housing sector has been a significant driver of recovery from most recessions in the United States since World War II. This time, however, a number of factors--including the overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and the large number of "underwater" mortgages (on which homeowners owe more than their homes are worth)--have left the rate of new home construction at only about one-third of its average level in recent decades. “

This deserves a special attention. Here Ben unfolds reasons one layer down. The housing sector slumps due to a number of factors. These factors are obvious results of the overall economic slump. What raises again the question on the reasons of the economic slump itself, and this is not housing as one can judge.

5. “ Nonetheless, financial stresses persist.”

Thus, the current financial crisis is a process which does not depend on real economic growth and when it is over, the economy will rocket up. Does that mean that the financial crisis could be healed without economic growth, but as it is? I would expect that the financial crisis will end when real economic growth recovers. In my opinion, it will happen in 5 to 10 years.

6. “In view of the deterioration in the economic outlook over the summer and the subdued inflation picture over the medium run ...”

This is a mere declaration of the status quo. However, the inflation projection is right as we showed many years ago

Political Calculations on GDP in Q3

There is an interesting post by Ironman @ Political Calculations. The author predicts the possibility of recession in the third quarter of 2011. It is in line with our projections of real GDP per capita in the US for the next five years. This post also uses the term "inertia" which we consider  the key phenomenon in real economic growth.

Goldman Sachs on recession in Germany

Via Market Watch - Goldman Sachs foresees a period of recession in eurozone with Germany falling into negative growth in the forth quarter of 2011. In May 2011, we posted on recession in germany and showed that this period will be a lenghty one ( http://mechonomic.blogspot.com/2011/05/how-long-will-last-real-economic-growth.html) . Figure 1 reproduces  some details of our prediction  of real GDP per capita in Germany.

Figure 1. Observed and predicted rate of real GDP growth in Germany after the reunification.
Lower panel - The original curves are smoothed with MA(3).

Paul Krugman compares inflation in US and Japan

Paul Krugman, after this piece admitting the general failure of economics, explains in here why inflation in Japan is very low (due to deflation expectations) and why the US will repeat all the way down. Except the future of the US inflation, i.e. deflation starting in  2012, there is no right explanation os the driving force behind price inflation. We explained the case of Japan five years ago, and predicted an extended period of deflation in the US six years ago. 

Oil falls - attractive to buy

Today, oil price has been declining since early morning. It looks more and more attractive to buy. For $78 per barrel one cac obtain between 3% and  5% return in a week or so with the price at $82 to $84. Two weeks ago we proposed the same thing and the return was around 10% with back and forth oscillations between $84 and $79.

Time to buy oil futures. Again

Ten days ago the price of oil was very low relative to its expected level in September. We concluded that it was a good time to buy oil futures because the price had to bounce back to $84. It did happen several days later and we proposed to sell at $84. Now it is a good time again to buy oil futures since the current price is below the expected equilibrium level for October, which is between $80 and  $82. The expected return at a two-week horizon is about 3%.