Inflation.
It’s been in the news constantly for the past week.
About a year ago, the Federal Reserve began pumping money into the economy like there was no tomorrow to get people to borrow and spend.
This helped drop interest rates to extremely low levels.
Yet, I think the inflation back then was partially offset by the fact that many limited their time spent in public places — such as any business where you might spend your money.
Not to mention that plenty of businesses weren’t, well, open and able to take people’s money in the first place.
But now that vaccines are rolling out, economies are opening, and mask mandates are dropping… are we finally getting hit with the full force of inflation?
Well, we might.
Inflation
Initially, last Tuesday and Wednesday, some good API and EIA inventory reports came out that pushed oil prices upwards.
But on that same Wednesday, the price jump weakened.
See, the government reported that, in April, consumer prices in the US jumped the largest amount they have ever in the past 12 years — to the tune of 4.2%.
To put that into perspective, the Fed generally targets an inflation rate of 2% and sometimes a tiny bit less.
In other words, HALF of April’s inflation number.
You’d think that, since inflation is an increase in prices, oil would keep going up.
But it’s not that simple.
Oil traders speculated that such rapid inflation would eventually pressure the Fed to get interest rates back up to slow down borrowing and spending — despite the Fed stating that they won’t alter their policy before the economy is in a full-on recovery. Less borrowing and spending would mean less oil demand since it’s so interwoven into the fabric of our economy.
It’s the same counterintuitive reason why the dollar strengthened in the face of inflation, which, you know, should make the dollar do the exact opposite. People are thinking the Fed’s going to tighten things up, which would mean less money available. Lower supply of anything makes it more valuable — including greenbacks.
And when the dollar strengthens, oil tends to weaken because it takes fewer US dollars (the world’s reserve currency) to get a barrel of crude. It’s fascinating how all this stuff is connected, but I digress.
All that said, it looks like the Fed’s reassurance began to work because traders seemed to have shifted their opinions by Friday, when prices began to climb again. I think they shifted from the “interest rates might go up” point of view to an “inflation means economic recovery, which means future oil demand” mindset.
Other Energy News
The oil market’s managed to absorb volatility from other happenings around the world — and it mostly comes back to oil supply and anticipation of a soon-to-be economic recovery.
For example, remember the Colonial Pipeline situation? The market managed to absorb that pretty easily, given Friday’s price action.
Same with the India COVID situation. Traders seem to be treating this as a short-term bump in the road that the world can help India overcome and get everyone back to a booming global economy.
Speaking of booming global economies, one last good piece of news for oil traders: travel season is upon us.
Summer’s almost here. That’s always a good time for the energy sector. But after a year like 2020, and with economies reopening right in time while mask mandates are slowly phased out in some areas…
I bet we’re going to see MASSIVE numbers of people driving and flying. I’ve already got $$ in my eyes.
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We’re almost out of this. We’re almost back to normal. The light might be at the end of the tunnel. Hang in there and stay safe!