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0 Sep 20 2012 @ 10:55am by Matt Smith in Crude Oil, energy consulting, Global Energy, risk management

The Tipping Point

Malcolm Gladwell is a total dude. He is the author of the fine book ‘Blink’ (about how choices aren’t as simple as they seem) and the splendid ‘Outliers’ (about the quirks which have made certain people successful). He also reminds me of Krusty the Clown. He too is the author of ‘The Tipping Point’, which is about how patterns and factors are at play in virtually every influential trend. Financial markets (and in Energyland™, of course) are awash with tipping points at the moment; here are but a few.

First up, and my personal favorite this week, is house prices plotted versus mortgage rates. As we all know the housing market has been depressed for, ooh, forever the best part of a decade. And all the while descending mortgage rates have been unable to provide a strong enough impact to spur on a bounce. However, with mortgage rates falling below 4% back in May, house prices have reached a tipping point, and the housing recovery appears underway.

Prices have been improving all year, and have just turned positive on a year-over-year basis for the first time since late 2010. This coincides not only with sub-4% mortage rates, but also the announcement of QE3 (the focus of which is to keep downward pressure on interest rates). In summary, a strong effort is underway to make sure a housing recovery gains traction. And, hark, even the mighty Louisville, Kentucky is feeling the effect of this – house sales were up 26% in August, with prices up 3.7% yoy.

Next up, an oldie but a goodie, and a textbook example of a tipping point. US retail gasoline prices peaked in the spring (as they did last year), but due to the combo of rallying oil prices and refinery outages (due to Hurricane Isaac, Midwest pipelines, etc), prices have uncharacteristically pushed to within a whisker of reaching a new high for the year.

But as the old addage goes, the best cure for high prices is high prices. Oil prices have rallied recently on hope, but the reality is that the current economy is not strong enough to cope with them presently. Hence the vicious sell-off we have seen in oil this week, which should trickle down to the pump; once again, the $4 level appears to be a tipping point…and lower we go from here (hurrah!).

This final chart is of certified emission reductions (CER’s) aka UN carbon permits. This system was set up seven years ago, with the goal that  poor countries could set up projects to reduce greenhouse-gas emissions and earn carbon credits, which could then be purchased by firms in rich countries to offset their emissions.

The problem has been however, that supply has far outstripped demand, leading to a glut of CERs, and hence a fall from grace from a price of over 25 euros in 2008 to a low of…..1.43 euros this week. I guess it isn’t the hugest revelation that we have reached a tipping point for CERs, given there is only 1.43 euros of downside left. That said, with CERs for next year also having fallen to a record low also (only 20 cents higher than Dec 2012 prices), although we may not see further downside, we will likely not see it rip higher anytime soon.

That concludes this week’s random observations. From this post hopefully you have gleaned some key (tipping) points:

–The housing market is recovering

–Low mortgage rates are set to stay (as long as QE3 is open-ended)

–Pain at the pump kicks in when gasoline prices approach four-dollardom

–UN carbon permits make US natural gas look like it is in a raging bull market

–Malcolm Gladwell’s books are a must-read

That’s all folks…thanks for playing!

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