By Barani Krishnan
Investing.com - Regardless of how high energy prices go over the next three months, what’s important to note is that inflation isn’t going to get any better for America or, for that matter, any part of the world.
Barring need, if the premise of demand is that one would only be able to pay what one could afford, then demand destruction is likely to set in if oil and natural gas prices keep rising and rising.
Anyone who has dabbled with commodities long enough will know the saying “the cure for high prices is, high prices.”
The theory is based on Economics 101, that unless we are talking about supplies that will decide between life and death, no raw material is going to challenge the rule of affordability.
Of course, it can be argued that without gas or oil to heat homes during an intense winter storm like this year’s Texas Blitz, people will die.
Similarly, at least 25,000 people die around the world each from hunger caused by famines and other food/grain shortages, according to United Nations estimates.
As humans, it’s virtually impossible for us to completely shut energy and agricultural commodities out of our lives, no matter how expensive they get.
Yet, quant fund manager Leigh Drogen reminded us in a blog a decade ago that we do get to bend the laws of our existence to some extent.
Proof? When gas prices at the pump become too expensive or food prices go through the roof, “we drive less, or not at all; we eat less, or in some sad cases not at all,” said Drogen.
And while it may not be as easy to avoid heating a home, additional thermal wear and blankets could help.
“Humans are extremely flexible when faced with crisis situations arising from resource scarcity,” Drogen added. “Adapt and survive, it is a basic human instinct, it’s a basic corporate instinct as well.”
While that blog may have been written 10 years ago, it’s surreally applicable for today’s Covid-struck world. Aren’t those exactly the things we’ve been doing the past 18 months? Didn’t we drive less and just ate what we could lay our hands on?
With many employers remaining super-flexible on remote working amid continued risks from the Delta variant of the virus, we can continue doing the same. As it is, weekly U.S. unemployment filings are stubbornly above 300,000 per work and we keep hearing complaints daily about employers being unable to find employees.
While it may have taken a once-in-a-century pandemic to alter practice of how and where work gets done, it doesn’t necessarily have to take millions of new infections a day for people to insist that they wish to work from home.
Don’t believe me? Ask OPEC.
At the height of the Covid outbreak, the oil cartel changed its game from meeting twice a year to having a Zoom meeting every month so that it could stay ahead of the constant twists and turns in the market.
While the pandemic is under better control now and OPEC could hold at least quarterly meetings at its Vienna headquarters, the cartel isn’t taking any chances. It continues meeting virtually each month because it's the best way for it not to get caught flat-footed by the market.
Consumers can play the same game, insisting they wish to work from home and drive less or drive only when necessary as the average U.S. gas price at the pump hits $3.19 a gallon, up from $2.18 a year earlier. Of course, we can argue that the pandemic-low of around $1 was too little for oil companies to survive on. Many still remember the mind-blogging $4 plus levels of the financial crisis when crude got to as high as $147 a barrel. Brent is now just under $80, and consumers can absorb more pain, oil bulls will argue.
The problem with that argument is each supply squeeze—and resultant price spike and bust—has its own trigger. What was tolerable 13 years ago might not be today for consumers getting hit left, right and center by inflation.
There are several catalysts for the present market situation in oil, one being the month-old Hurricane Ida—a phenomenon that no right-thinking person could have imagined would have lasted this long.
As of Thursday, some 294,414 barrels equivalent of oil, or 16.2% of the production in the U.S. Gulf Coast of Mexico remained shut-in, according to the Bureau of Safety and Environmental Enforcement, the government agency responsible for keeping track of this.
Natural gas, of course, is the other main driver for what’s happening in oil. As of Friday, natural gas prices were up more than 100% on the year. At this month’s peak of $5.65 per mmBtu, or million British thermal units, they were below the February 2014 peak of $6.49.
There’s talk that natural gas prices could get to $6 per mmBtu or beyond in coming weeks. If that’s the case, and fuel prices go even higher at the pump, it may just be the trigger for consumers to start reacting in unexpected ways.
New York-traded West Texas Intermediate, the benchmark for U.S. oil, settled up 68 cents, or 0.9%, at $73.98 per barrel. For the week, WTI rose 2.8%.
London-traded Brent crude, the global benchmark for oil, settled up 84 cents, or 1.1%, at $78.09. For the week, Brent gained 3.7%.
It was a fifth straight week of gains for WTI and a fourth in five weeks for Brent, which are both up about 50% on the year.
Earlier in the session, WTI got to a peak of $74.27, its highest since October 2018. Brent, meanwhile, hit $78.24, setting a similar milestone.
U.S. gold futures’ most active contract, December, settled down $1.90, or 0.1%, at $1,751.70 per ounce on New York’s Comex.
For the week though, it was virtually flat, in fact settling 30 cents higher from last Friday.
But to those tracking the market, especially the long investors who have repeatedly been burned following optimistic forecasts of the past nine months, the real weekly comparison should have been against last Wednesday.
That was the day when gold lost 2%, its most since early August, as U.S. bond yields spiked and the dollar girded higher as well on speculation of hawkish Federal Reserve action over its economic stimulus and lower-for-longer interest rates.
“Gold has been battling against a stronger dollar that stemmed from surging Treasury yields post-Fed,” said Ed Moya, analyst at online trading platform OANDA.
“Gold is in a very tough spot and volatility will remain elevated with the risks remaining to the downside. The U.S. growth story will continue to improve if COVID modelers are right about a steady decline in COVID cases through March.”
Moya added that gold longs could be in further trouble if Chinese property giant Evergrande (HK:3333), which rocked markets this week with its growing debt crisis, managed to avert a contagion. “If the Evergrande fallout is contained over the weekend, gold could be vulnerable for a test of the $1,700 level.”
Fed Chair Jay Powell said at the conclusion of the central bank’s monthly policy meeting on Wednesday repeated his mantra that inflation was trending above the Fed’s target of 2% per annum due to the higher costs of doing business in a pandemic-constrained economy.
The market has consistently shown that it has little faith in the Fed to be able restrain inflation and sent bond yields to multiple-year highs since the end of 2020 to reflect that. Gold, a non-yielding asset branded as a safe haven, has been the principal victim of yield hikes.
Cushing crude inventory estimates (private)
American Petroleum Institute weekly report on oil stockpiles.
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
EIA weekly report on natural gas storage
Baker Hughes weekly survey on U.S. oil rigs
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.
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