The oil price rally got a big boost last week with the assassination of the Iranian General Qassem Soleimani. Will that be enough for prices to continue increasing or will they flatten and decline in coming weeks?
Markets are presently engaged in “fear premium” price discovery. So far, the fear premium is modest. At this writing, WTI is $63.56, $0.51 higher than its close of $63.71 on Friday; Brent is $0.71 higher at $69.31.
WTI prices have increased 21% since early October (Figure 1) exceeding the $62 level of the September Saudi refinery attacks.
Figure 1. WTI price exceeded level of September 2018 Saudi refinery attack on January 3, 2019. Source: Quandl and Labyrinth Consulting Services, Inc.
Previous 2019 rallies reached similar levels before failing. That is because they were based mostly on expectations of supply constraints and not on actual market tightness. When the reason for that expectation disappeared, prices fell. The latest rally probably represents more of the same.
It has required more substance to continue than previous surges. Markets are wary and needed something more tangible than possibility. In late November, a new OPEC+ production cut and a U.S. China trade pact provided the jab and the cross within days of each other.
Just as the rally was losing momentum again, it got another boost when a U.S. drone killed Qassem Soleimani on January 3. The specter of war pushed WTI prices to a 9-month high.
The first reason is implied volatility. Volatility is the degree of daily price variation, not the level of prices themselves. Implied volatility and oil price ordinarily correlate negatively: high volatility signals lower oil prices and conversely, low volatility characterizes periods of price increase. There are exceptions to this empirical observation.
Figure 2 shows implied oil-price volatility since 2000. The greatest volatility responses were from the 2008-2009 Financial Collapse, the Arab Spring uprisings in 2011, the oil-price collapse of 2014-2015 and the attack on Saudi oil refineries in September of last year.
Last week’s volatility was much less significant than those. It was also less significant than most smaller spikes over the last decade.
Figure 2. Oil-price volatility accompanying the Soleimani assassination was subdued compared to other volatility events since 2000. Source: EIA, Quandl and Labyrinth Consulting Services, Inc.
Brent front-month price increased +$2.35 to $68.60 on January 3 when the assassination was announced but it had fallen -$1.91 to $66.25 the week before (Figure 3). The 3-month price rally may have been losing momentum. Soleimani’s death merely adjusted the rally back to its earlier trajectory.
Figure 3. Brent front-month price increased +$2.35 to $68.60 on January 3 but it had fallen -$1.91 to $66.25 before Soleimani’s assassination. This suggests that the 3-month price rally may have been losing momentum. Source: EIA and Labyrinth Consulting Services, Inc.
The second reason why this event may not have lasting effect on oil prices is that the resulting “fear premium” has been relatively small so far.
The latest price increase indicates only about a $2.50 WTI and $3.50 Brent “fear premium” based on comparative inventory data. Comparative inventory (C.I.) vs WTI spot price for December plots on the blue yield curve for 2015 through 2019 (Figure 4). This indicates that WTI should be approximately $61/barrel at that inventory level. The January 3 futures closing price of $63.04 was, therefore, only about $2.00-$2.50 over-valued.
Figure 4. WTI $63 front-month price includes about $2.00 “fear premium” based on the blue 2015-2019 comparative inventory yield curve. Source: EIA and Labyrinth Consulting Services, Inc.
The relatively flat slope to the yield curve reflects a low sense of supply urgency by oil markets. This is consistent with the limited price response a few months ago to attacks on Saudi oil refineries. That had an immediate effect on physical oil supply. There is no reason to expect that the more abstract potential for future supply loss from this event should have more effect on oil prices. Related: The Hottest Permian Takeover Targets For 2020
Low fear premium and price volatility suggest that markets probably do not consider Soleimani’s assassination a substantive cause for more than a temporary spike in oil prices.
And then there’s the Trump factor. The American president’s quarrel with Iran has been a key component in the three major oil-price rallies of 2019 and 2020.
His threat to block Iranian oil exports was the main reason for the April to October 2018 price increase (Figure 5). When he reneged and granted waivers, oil prices collapsed. The catastrophic investor losses because of this head-fake cannot be understated. Trump’s mood swings add uncertainty to an already risky market and are one of the main reasons that investment money has been on the side lines for oil.
Figure 5. U.S. – Iran tensions have been a factor in the price rallies of 2019 and 2020. Source: Quandl and Labyrinth Consulting Services, Inc.
Last week’s assassination of Soleimani marks the third time in less than two years that the Trump administration’s policy toward Iran has been a key factor in oil price rallies and failures. Markets have learned painfully that the American president’s bluster has faded in the fact of conflict.
Conflict might break out and, if it does, prices will surge. It is more likely that markets will revert to the proverb: Fool me once, shame on thee; fool me twice, shame on me.
TOKYO (AP) — Japanese technology group SoftBank swung back to profitability in the July-September quarter, boosted by positive results in its Vision Fund investments.
Tokyo-based SoftBank Group Corp. reported Tuesday a fiscal second quarter profit of nearly 1.18 trillion yen ($7.7 billion), compared with a 931 billion yen loss in the year-earlier period.
Quarterly sales edged up about 6% to nearly 1.77 trillion yen ($11.5 billion).
SoftBank credited income from royalties and licensing related to its holdings in Arm, a computer chip-designing company, whose business spans smartphones, data centers, networking equipment, automotive, consumer electronic devices, and AI applications.
The results were also helped by the absence of losses related to SoftBank’s investment in office-space sharing venture WeWork, which hit the previous fiscal year.
WeWork, which filed for Chapter 11 bankruptcy protection in 2023, emerged from Chapter 11 in June.
SoftBank has benefitted in recent months from rising share prices in some investment, such as U.S.-based e-commerce company Coupang, Chinese mobility provider DiDi Global and Bytedance, the Chinese developer of TikTok.
SoftBank’s financial results tend to swing wildly, partly because of its sprawling investment portfolio that includes search engine Yahoo, Chinese retailer Alibaba, and artificial intelligence company Nvidia.
SoftBank makes investments in a variety of companies that it groups together in a series of Vision Funds.
The company’s founder, Masayoshi Son, is a pioneer in technology investment in Japan. SoftBank Group does not give earnings forecasts.
Shopify Inc. executives brushed off concerns that incoming U.S. President Donald Trump will be a major detriment to many of the company’s merchants.
“There’s nothing in what we’ve heard from Trump, nor would there have been anything from (Democratic candidate) Kamala (Harris), which we think impacts the overall state of new business formation and entrepreneurship,” Shopify’s chief financial officer Jeff Hoffmeister told analysts on a call Tuesday.
“We still feel really good about all the merchants out there, all the entrepreneurs that want to start new businesses and that’s obviously not going to change with the administration.”
Hoffmeister’s comments come a week after Trump, a Republican businessman, trounced Harris in an election that will soon return him to the Oval Office.
On the campaign trail, he threatened to impose tariffs of 60 per cent on imports from China and roughly 10 per cent to 20 per cent on goods from all other countries.
If the president-elect makes good on the promise, many worry the cost of operating will soar for companies, including customers of Shopify, which sells e-commerce software to small businesses but also brands as big as Kylie Cosmetics and Victoria’s Secret.
These merchants may feel they have no choice but to pass on the increases to customers, perhaps sparking more inflation.
If Trump’s tariffs do come to fruition, Shopify’s president Harley Finkelstein pointed out China is “not a huge area” for Shopify.
However, “we can’t anticipate what every presidential administration is going to do,” he cautioned.
He likened the uncertainty facing the business community to the COVID-19 pandemic where Shopify had to help companies migrate online.
“Our job is no matter what comes the way of our merchants, we provide them with tools and service and support for them to navigate it really well,” he said.
Finkelstein was questioned about the forthcoming U.S. leadership change on a call meant to delve into Shopify’s latest earnings, which sent shares soaring 27 per cent to $158.63 shortly after Tuesday’s market open.
The Ottawa-based company, which keeps its books in U.S. dollars, reported US$828 million in net income for its third quarter, up from US$718 million in the same quarter last year, as its revenue rose 26 per cent.
Revenue for the period ended Sept. 30 totalled US$2.16 billion, up from US$1.71 billion a year earlier.
Subscription solutions revenue reached US$610 million, up from US$486 million in the same quarter last year.
Merchant solutions revenue amounted to US$1.55 billion, up from US$1.23 billion.
Shopify’s net income excluding the impact of equity investments totalled US$344 million for the quarter, up from US$173 million in the same quarter last year.
Daniel Chan, a TD Cowen analyst, said the results show Shopify has a leadership position in the e-commerce world and “a continued ability to gain market share.”
In its outlook for its fourth quarter of 2024, the company said it expects revenue to grow at a mid-to-high-twenties percentage rate on a year-over-year basis.
“Q4 guidance suggests Shopify will finish the year strong, with better-than-expected revenue growth and operating margin,” Chan pointed out in a note to investors.
This report by The Canadian Press was first published Nov. 12, 2024.
TORONTO – RioCan Real Estate Investment Trust says it has cut almost 10 per cent of its staff as it deals with a slowdown in the condo market and overall pushes for greater efficiency.
The company says the cuts, which amount to around 60 employees based on its last annual filing, will mean about $9 million in restructuring charges and should translate to about $8 million in annualized cash savings.
The job cuts come as RioCan and others scale back condo development plans as the market softens, but chief executive Jonathan Gitlin says the reductions were from a companywide efficiency effort.
RioCan says it doesn’t plan to start any new construction of mixed-use properties this year and well into 2025 as it adjusts to the shifting market demand.
The company reported a net income of $96.9 million in the third quarter, up from a loss of $73.5 million last year, as it saw a $159 million boost from a favourable change in the fair value of investment properties.
RioCan reported what it says is a record-breaking 97.8 per cent occupancy rate in the quarter including retail committed occupancy of 98.6 per cent.
This report by The Canadian Press was first published Nov. 12, 2024.
