One of my few predictions for the coming year (apart from a Q2 equities sell-off plus surging commodity prices) is that we might see a big spike in oil prices this year, with the possibility of oil pushing past $80 a barrel.
On that score interesting to note the paragraph below from energy specialists Guinness – physical inventories are tightening all the time. All we need is a shock to push prices aggressively higher. …
“OPEC+’s continued micro-management of the oil market in the first quarter of 2021 has resulted in tightening inventories and rising short-dated oil prices. The Brent spot price, a key driver of the energy equity sector, rose by 22% from $51.2/bl to $62.4/bl, whilst the WTI spot price increased by the same percentage. Longer-dated prices also rose, helped by the improved inventory situation and the lack of investment in non-OPEC supply starting to show up. Five year forward Brent was up by 8% to $53.1/bl, leaving the forward curve in reasonable backwardation, another goal that OPEC are trying to achieve.”
Talking of ‘liquidity’, one area facing a liquidity shortage was the US stockmarket last week, post-Archipelago trading. Here is an incisive analysis from SG’s quant analysts.
“As in any deep crisis, liquidity dried up. We define liquidity as the ability to trade a large size of a listed future at a price close to its perceived fair price. The availability or scarcity of liquidity has become one of the determinants of realised volatility. Uncertainty reduces the willingness of market markers to provide liquidity, and a liquidity drought exacerbates the volatility of price moves.
“Last week’s sell-off in several technology and media stocks is a confirmation of such a feedback loop, albeit caused by a different sequence of events. The week had started with a pronounced sell-off in some names in these sectors and ended with large block selling trades on Friday. That had a large impact on the liquidity of those stocks.
“We have identified 12 stocks that posted significant losses last week and two stocks as reference…. For most of these stocks, not only did volumes far exceed their long-term average, but the liquidity on offer also dropped massively (see left-hand chart below). The ratio of liquidity demand over supply has surged to stressed levels.
“There is one way to hedge against liquidity drying up, and that is by following trends during the day. The trading rule is simple: the day starts with no position at all. The trader then gradually builds up a position that is proportional to the trend during the day. If the current price is low relative to the previous day’s close, then a short position is built, and vice-versa. All positions are unwound at the close of the day, with the investor implicitly acting as a liquidity provider for those constrained to trade (and follow the direction of the market) at the close.”
Following on from that liquidity inspired thought, I have a column out this week for Citywire USA on ETFs. Its main subject is how small-cap ETFs are becoming ever more popular.
That recent development has one unfortunate result: ETFs end up owning big chunks of stock in illiquid small-cap stocks.
The chart below is from a recent analysis by BoA analysts looking at small-cap ETFs. It highlights those stocks where ETFs are the biggest shareholders….you wouldn’t be on the wrong end of a rush to exits with these stocks.