Now let’s get this straight… in reaction to the downgrade of the creditworthiness of the U.S. by Standard & Poor’s, global equity markets tanked, gold surged to a record, oil sank and U.S. debt – the assets directly affected by S&P’s downgrade — rallied.
Confused? The markets certainly are. For example, in spite of S&P questioning Uncle Sam’s ability to make good on its IOUs, the benchmark U.S. 10-year Treasury note spiked by 25/32 which pushed the yield to 2.32%.
In other words, the market reacted to U.S. debt concerns by making credit terms even more attractive.
Thus, with global financial markets now officially in la-la land, what can we make of the extant selloff in energy markets?
Spot ICE Brent oil futures for September delivery have closed lower in 10 of 17 sessions since turning prompt. More importantly, the average daily return for a short-trade is double that of a long-trade. To this effect, the contract has been falling on average by $0.74/b a day over the last month.
At the same time, Comex gold settled at over a 21 multiple to Nymex WTI, i.e. per yesterday’s settles, one ounce of gold was worth more than 21 barrels of in New York. That is the widest this relationship has been since the depths of the oil implosion in the first quarter 2009 and ranks in the 89th percentile of the last 20 years.
This begs the question, is oil a buy right now?
Perhaps it is, but we have no interest in attempting to catch a falling dagger. Thus, for the time being, is advising clients that we continue to maintain our daily bearish bias.
Stephen Schork is the Editor of and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.