The oil price meme…

As the oil price passes USD 80 there is a really interesting post (lengthy, but great) here from Epsilon Theory on memes:

If you get nothing else from Epsilon Theory, get this: we are ALL hard-wired — literally hard-wired through millions of years of neurological evolution — to respond positively to effective meme introduction. We are ALL programmed — literally programmed through tens of thousands of years of cultural evolution — to respond positively to effective meme introduction. It’s no exaggeration to say that our biological and cultural symbiosis with memes defines the modern human species. This is a feature, not a bug.

Eusocial animals (the “pure” form of what it means to be a social animal) swim in an ocean of constant intra-species communications. It’s why these species — the ant, the termite, the bee, and the human — are the most successful multicellular animal species on the planet. Eusocial animals have the ability to store, retrieve and broadcast information (yes, eusocial insects communally “remember” incredibly complex informational structures) in a way that non-eusocial animals simply can’t, and it allows the eusocial animal not only to survive its environment, but to master its environment. Any environment. Humans are essentially giant termites with opposable thumbs and fire, and that combination is particularly unstoppable. But it’s the termite-ness … it’s the swimming in an ocean of constant intra-species communication … that’s the most important of these qualities.

Right on cue this week the FT carried a piece from the research firm Energy Aspects:

While there has been breathless attention paid to prompt Brent prices climbing to $80 a barrel for the first time since 2014, what has received less attention is that the entire Brent forward curve is now trading above $60, including contracts for delivery as far out as December 2024.

This development is an important psychological milestone for the oil market. The market is, in effect, saying that “lower for longer” is dead. (Emphasis added).

Narratives and memes are getting a lot of focus in economics for the right reasons as the above authors realise.

The Bank for International Settlements this week came out with some research that suggested 30-35% of the movement in oil prices was down to demand and supply and the rest of the movement down to potentially financialisation, speculation and other factors.

Another of the big (related) reasons for the procyclicality of the oil price (which the BIS touch on) is the structutral nature of the trading firms in the oil market. When the price is going up CFOs/Risk Officers feel good because they are buying at 70 and selling at 75. So bid/ask spreads narrow, inventory goes up, leverage goes up, and risk is on… whereas on the way down the value of inventory is declining, leverage does down, the bid ask spreak widens, volumes drop… we’ve been here before. Where we haven’t been before is in an oil market where a marginal producer has potentially such a powerful impact on the market.

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