Summer of Oil

Macro Perspectives: Wed 2 Jun 2021

On Friday, the April inflation report showed the biggest monthly percentage point jump (in year-over-year core PCE) on record. As I said last week, we are already seeing inflation running at a pace we haven't seen for at least forty years...and we haven't seen anything yet.

Wait until the May data starts rolling in, last year the price of crude oil rose 12%.

What's a key contributor to the inflation picture? Oil.

The Fed doesn't like to admit it. In fact, they like to strip out food and energy in the data they publicly focus on, but their actions (historically) tell a very different story. They have a history of acting when oil moves, because material adjustments in oil prices matter (up and down for inflation). And we are having a material adjustment, UP.

After the Memorial Day weekend, the first weekend in more than a year that the country is getting back to a semblance of normal life, the demand pressure on oil prices has only intensified.

With that, by yesterday morning, oil was already up 3.5% and trading to new two-and-a-half year highs - nearing $70.

OPEC responded with a gradual production increase. But make no mistake, the globally coordinated "Clean Energy Revolution" has realigned the global oil market and has set the path for oil prices - higher. OPEC countries will be happy to sell us oil at higher and higher prices, in a less competitive, lower supply world.

Now, speaking of May data, we had the ISM Manufacturing Report from May. The theme continues from the prior month: supply shortages, labor shortages, overwhelming demand and rising input prices. No surprise, the price index in the survey expanded for the 12th consecutive month.