Can you tell your oil market contango from your backwardation? Whether commodity futures are above or below spot prices indicates the market’s view of their likely direction of travel. For much of the past two years, a surplus of oil supply meant that futures contracts for delivery months down the road have been priced higher than those buying today. This is known as a market contango in oil traders’ lingo.
Now, though, it seems that something has changed. It’s nearly a year since the Opec cartel agreed a much-mocked rationing plan with Russia, but the deal has mostly held, while cheaper oil has stimulated worldwide demand. Now contango has been replaced by what traders call backwardation, as a tightening market has flipped spot oil prices above future contracts, and this week Brent crude is up to $59 a barrel, a two-year high.
It is not only Opec that has undergone a quiet revolution. The oil companies have transformed themselves since the slump destroyed the economics of their grandiose schemes. BP’s chief executive Bob Dudley told a conference earlier this month that its cost of extracting a barrel from the North Sea had been halved from $30, and should reach $12 by 2020. Efficiency gains mean that projects which had looked marginal at $100 are now worth doing at $50.
The share prices of Big Oil seem not to have recognised this revolution. Their low ratings owe more to yesterday’s doom-laden warnings of “stranded reserves” and predictions of the end of the oil age. The sterling yield from BP’s dividend varies with the exchange rate, but the past four quarterly payments add up to a return of 6.8 per cent at 474p.
It’s a similar story for (us) shareholders in Royal Dutch Shell. Oilers are never going to be rated as growth stocks, but they are currently being treated as if they are high-risk annuities, paying capital out from a dying industry. Oil is going to drive the world’s economy for many years yet, even if one day it doesn’t drive your car. In the meantime, those dividends look more secure than at any time since the price slump.
The back-story
FT editors select the stories that explain what is moving crude oil prices
How to save £86bn with no pain
Perhaps you thought that £56bn was a bargain price to shave a few minutes off the time needed to escape Birmingham to London on the train. Unfortunately, as the promoters of HS2 are now explaining, this is only the downpayment. Without another £30bn or so, you’ll spend so long fighting through an overcrowded Euston that any advantage will be trampled underfoot.
The extra money would (supposedly) buy Crossrail 2, the line on the map connecting Dalston to Wimbledon. Without it, HS2 “won’t work properly”. As an example of the contempt shown for any rail project outside the capital, this is a peach.
While billions are wasted on a vanity project which everyone, including the National Audit Office, knows is not worth doing, electrification of existing lines has almost stopped: it will be diesel only between Oxford and Cambridge, Cardiff and Swansea, Kettering and Sheffield, Windermere and Oxenholme. Manchester to Leeds is “under review”.
The cost of all of them together is a mere rounding error in HS2 money, and in an attempt to shame the government into more rational behaviour, IPPR North, a think-tank, calculates transport spending at £282 per head in the north, against £680 in London. It is still not too late to pull the plug on the HS2 money sink. That would surely be better than waiting for shadow chancellor John McDonnell’s first financial crisis to force its cancellation.
Get well soon
“Investing in price” is a popular retail euphemism for failure to sell enough stuff more expensively, but Card Factory is holding prices down to put the bite on less efficient competitors. This means a short-term pain in the p&l for long-term gain, the way responsible managements are supposed to behave.
Oh no, it’s a profit warning! The shares fell by a fifth in disappointment. Putting up prices would avoid this unpleasantness, but would damage the strategy of long-term card-market dominance. It’s a classic demonstration of stock market short-termism. Of course, the pain is real and the gain uncertain, but this is a well-run, highly competitive company whose management deserves the benefit of the doubt. Too bad that at the moment it doesn’t get it.
A full list of Neil Collins’ financial interests can be found at http://ift.tt/1Msbsv6
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