Inflation Hysteria #2 (WTI)

Sticking with our recent theme, a big part of what Inflation Hysteria #1 (2017-18) also had going for it was loosened restrictions for US oil producers. Seriously. Legacy of the 1970’s experience depending too much on OPEC, subject to embargoes, American oil companies had been prohibited for decades from exporting oil. Not that it would have mattered before 2014, the country never producing near enough to have ever done so.

Export limitations removed, shale boom well underway, export crude they did – and right into the mix of TCJA and globally synchronized growth. The WTI curve still in contango up until mid- to late 2017, the sudden rush of black gold from the US to foreign shores absolutely helped rebalance the domestic market setting up the WTI curve for its hysteria-aligned shift back into backwardation.

With more customers for US crude oil, inventories relaxed as the backwardation buoyed the domestic benchmark oil price setting the CPI up for higher returns. TIPS trading, therefore, at least shorter run inflation expectations (breakevens), followed along (as did longer run expectations if to a lesser degree).

While clearly a period meeting the textbook definition of hysteria, there was at the very least some consistent even rational basis underlying it.

This Inflation Hysteria #2, by contrast, runs on…hope alone. Vaccines and massive government aid are tossed around as if dei ex machina magically fixing the huge economic mess (piled on top of previous massive government aid that hadn’t fixed the mess). Though not really growing in 2017 and 2018, the background economy wasn’t anywhere close to this bad.

Nowhere is this disconnect more apparent than oil.

The fundamentals for crude continue to be crudely atrocious – and getting worse by the week. Start with global demand for American products; as you can see above, exports are down, and remain down, by a whopping 22% from mid-March. One consequence, oil inventories continue to pile high even as domestic production has been cut by about 16%.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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