SHORT VIEW

Spot oil prices, now just above $50 a barrel, usually attract all the attention. Recently, however, the price movements in some far forward contracts have been more dramatic, with prices hovering at a five-month high of about $80 a barrel. Take the West Texas Intermediate contract for delivery in December 2015, a relatively liquid future used as a proxy for long-term prices, which closed last week at $79.8 a barrel, the same level as 18 months ago. Spot prices, meanwhile, are at levels of four years ago.

The strength of forward oil prices reflects the concern that while the credit crisis has an impact on demand, supply-side impacts will lag behind and become evident only from next year. The International Energy Agency, the western countries' oil watchdog, estimates that spending on exploration and production of oil this year is likely to drop by 20 per cent, double the initial forecast. “Non-Opec project cancellations and slippage out of the 2009-2010 start-up horizon alone stand at 1m barrels a day or more,” it says, adding that supply losses could be even bigger as oil companies curtail maintenance in mature fields in the key regions of North America, the North Sea and Russia.

The investment thesis in forward oil prices says that when the economy starts to recover next year it will discover that supply is falling, pushing prices sharply higher. It also reflects higher costs in areas such as deep water or oil sands and Opec's desire to lift prices towards $75 a barrel in the medium term. It is a plausible investment scenario. But it could still suffer if the natural sellers of forward oil contracts – companies seeking to secure their cash flow to finance projects, which until now have been almost absent – return to the market, taking the opportunity of high forward prices to raise finance, bringing prices down. For investors, it is still a two-way street.

SHORT VIEW

Spot oil prices, now just above $50 a barrel, usually attract all the attention. Recently, however, the price movements in some far forward contracts have been more dramatic, with prices hovering at a five-month high of about $80 a barrel. Take the West Texas Intermediate contract for delivery in December 2015, a relatively liquid future used as a proxy for long-term prices, which closed last week at $79.8 a barrel, the same level as 18 months ago. Spot prices, meanwhile, are at levels of four years ago.

The strength of forward oil prices reflects the concern that while the credit crisis has an impact on demand, supply-side impacts will lag behind and become evident only from next year. The International Energy Agency, the western countries' oil watchdog, estimates that spending on exploration and production of oil this year is likely to drop by 20 per cent, double the initial forecast. “Non-Opec project cancellations and slippage out of the 2009-2010 start-up horizon alone stand at 1m barrels a day or more,” it says, adding that supply losses could be even bigger as oil companies curtail maintenance in mature fields in the key regions of North America, the North Sea and Russia.

The investment thesis in forward oil prices says that when the economy starts to recover next year it will discover that supply is falling, pushing prices sharply higher. It also reflects higher costs in areas such as deep water or oil sands and Opec's desire to lift prices towards $75 a barrel in the medium term. It is a plausible investment scenario. But it could still suffer if the natural sellers of forward oil contracts – companies seeking to secure their cash flow to finance projects, which until now have been almost absent – return to the market, taking the opportunity of high forward prices to raise finance, bringing prices down. For investors, it is still a two-way street.

SHORT VIEW

Last week, world stock markets staged a brief rally on hopes from China. This week, they have rallied in spite of China.

The welter of new information from Beijing this week is hard to interpret; year-on-year comparisons are tricky thanks to the Chinese new year. But in essence, we have learnt that China now has deflation; that its stimulus package, announced in November, has prompted huge domestic investment; and that both imports and exports have fallen by a quarter over the last year, bringing down the trade deficit.

Stocks in China itself have sold off, with the Shanghai Composite now down about 10 per cent from its recent high. Logic suggests that the fall in the Chinese surplus might help redress global imbalances (excessive Chinese savings combined with excessive US debts). But by reducing China's demand for US securities, it might make it harder for the US to fund its deficit.

This logic does not, however, appear to have moved markets, which instead suggested that investors had a renewed appetite for risk. The dollar did slip a bit, but gold continued its recent decline – having briefly punctured $1,000 per ounce, it has now come back below $900 – while stocks largely held on to Tuesday's gain.

Should US or European stocks have sold off on the Chinese news? Not necessarily. By this week, the S&P 500 had priced in much future bad news.

As of Tuesday, it needed to gain 56.5 per cent just to return to its 200-day moving average, a measure of the long-term trend, which for each day takes the average of the 200 previous days' prices.

The bear market rally from November to early January took the S&P from needing to gain 65.7 per cent to get to this trend line, back up to needing to gain only 26 per cent. So stock prices could rise much more from here without changing the downward trend.