Some of you may remember an article I wrote in our January issue looking at the historic ratios between oil, gold, the FTSE 100, UK property and London property. At the start of this year I wrote that the most out of kilter ratio was the Brent Crude price (at the time of writing it was $63.62 per barrel) and London property (at the time £471,800).
The 20-year historic ratio between the two is 4.7 (London property divided by 1,000, divided by 4.7 should be the same as the oil price). This implied that either oil should be around $100/b or London property prices needed to fall.
Despite recommending remortgaging London property and going long on the oil price at the beginning of 2017 also, (which earned a ROI of 48% that year), I suggested repeating the same trade again in 2018. So, around nine months later, how would that trade have worked out so far this year? At the time of writing (16th September), the Brent Crude oil price was $78.06/b, a rise of a 22.7% so far this year. London property prices have continued to slide (albeit slowly) falling by 0.6% in the first six months of 2018, to £468,800 at the end of Q2.
This drop in value of £3,000 would have been sweetened by a £107,000 profit going long on the oil price to the same value as
a typical London property, using a 25% deposit (by taking out a remortgage on your London property) on a trading exchange. In fact, the ROI earned from that remortgaged cash, were you to exit the trade in mid-September, would be 90.8%, or around 10% per month. In the past three years of writing about historic ratios of major asset prices in PIN, and detailing which trade the ratios indicate should be made, the following year has always seen a reversion to mean of those asset prices and outstanding profits.
In this article we will not dwell on the historic ratios any longer (we will save that for our end of year review) but instead take a look at oil price expectations in general and what impact they may have on inflation, interest rates and ultimately, property prices.
Oil hovers near $80 a barrel as concern grows over global supply
Oil was close to its highest level this year in mid-September, after a drop in US crude inventories and the prospect of the loss of Iranian supply added to concerns over the delicate balance between consumption and production.