Surging Oil Prices Light Inflation on Fire

Photo by Zbynek Burival on Unsplash

It was only yesterday that I said the obituary for inflation was prematurely written by the celebrated gurus in the mainstream media who claimed fossil-fuel prices, which were the driver of inflation in the latest report, were just “temporary” (a.k.a. “transitory). “Not so,” said I, and not so it certainly is today as the news headlines just got a gusher of news about rising oil prices to the end of the year.

One article from CNBC announces that West Texas Intermediate just broke past $90 a barrel. Only a few days ago Brent crude managed the same. More to the point, the situation is forecast as most likely to continue for the reasons I noted as being likely yesterday:

Saudi Arabia and Russia have extended their oil output cuts to the end of 2023, and the move could result in a substantial market deficit for the rest of 2023, the International Energy Agency said on Wednesday, the International Energy Agency said on Wednesday.

“From September onwards, the loss of OPEC+ production... will drive a significant supply shortfall through the fourth quarter,” the agency said in its monthly report.

And the coup de grâce:

Rising crude prices could mean higher gasoline prices at a time when the economy is trying to recover and solve the inflation problem.

Yes, there will be no cure to the inflation problem coming from petrol this year.

Another article from Oilprice.com even suggests several reasons that oil could hit peaks that break $100 per barrel in the final quarter of this year:

Oil prices have soared to a 10-month high on Wednesday, with a surprise build in U.S. crude inventories failing to dampen expectations of tight supplies for the rest of the year….

Commodity analysts at Standard Chartered remain firmly in the bull camp. The analysts have noted that oil prices have been driven higher in Q3 by sharp falls in inventories caused by excess demand, and have predicted that dynamic will continue in Q4. According to StanChart’s demand model, global crude inventories rose by 203 million barrels (mb) in H2-2022 but have forecast a 180 turn from that trend with global inventories expected to fall by 313 mb in H2-2023….

Market sentiment has now improved quite dramatically, with hedge funds rushing back into the oil market with their most bullish wagers in more than a year after the extension of cuts by Saudi Arabia and Russia have sent crude surging 30 per cent since mid-June. In fact, the latest data showing positioning by money managers has revealed that they are at the most bullish on U.S. crude since June 2022. 

Still another article from Oilprice.com says that China is on a buying spree to stock up on Liquid Natural Gas, which is expected to continue through the fourth quarter, driving up the price of NatGas:

Following a record slump last year due to Covid-19, China's gas consumption is rising again, putting pressure on a fragile global natural gas market as Europe faces its own supply concerns…. Despite Europe having achieved its gas storage target ahead of schedule, the situation is precarious, with warnings of potential gas shortages and high volatility.

Don’t worry though: Another story today notifies us that Team Biden is back on it. So “transitory” is the rise in the price of gasoline that drove inflation higher, that the Biden Admin. is worried. And, so, another fist bump heard around the world is on its way:

US contacts oil producers, refiners as gasoline prices rise.

The U.S. Energy Department has talked to oil producers and refiners to ensure stable fuel supplies at a time of rising gasoline prices, Jared Bernstein, head of the White House Council of Economic Advisers, said on Wednesday.

Yeah, because that is what you do when you are as confident as the mainstream financial media was that oil prices are merely transitory, nothing to worry about, and so inflation is on its way down and out. You start making phone calls and rattling cages like Biden did with the Saudis (to no effect) to get supply up.

Rising gasoline prices were largely behind the largest increase in U.S. consumer prices in 14 months in August.

Yes, they were; and, rather than a breath of hope because oil is just volatile like that, they are a force that drives up the price of everything else and show no signs of abating this year.

Officials from President Joe Biden's administration reached out last week to oil industry companies to assess inventory levels and learn of any planned shutdowns of refineries, after Saudi Arabia and Russia extended voluntary oil output cuts to the end of the year, a U.S. refining source involved in the talks told Reuters.

"The White House wants to make sure everyone is focused here on potentialities for systemic disruptions that could create a supply problem," said the source, who is not authorized to speak publicly about internal discussions.

Yeah, that sounds like something about to go away on its own.

Gasoline prices are expected to rise further in some regions during US refinery maintenance this autumn, especially given the additional impact of Saudi Arabia’s extended production cuts on crude oil prices.

So, the transitory argument is falling apart as quickly as they can manufacture ink to print it.

It’s kind of odd to hear that the Biden Admin. is worried about goosing supply lines of oil when they won’t extend oil pipelines.

The American Petroleum Institute, the top U.S. oil lobby group, said the Biden administration has "taken every opportunity to restrict production both now and in the future."

"This administration has delayed a 5-year program for offshore exploration, stymied infrastructure development, removed millions of acres from leasing in the Gulf of Mexico, and revoked leases in Alaska, all while pushing costly and ineffective policies designed to limit consumer choice. It doesn’t have to be this way," the group said in a statement.

I’m sure Plan Biden is to jawbone the crown prince of Saudi Arabia more as he did so ineffectively last time, but I don't think the atmosphere is such that his efforts will be any more effectual this time:

Senate subpoenas Saudi’s $700bn sovereign wealth fund over US dealings

That ought to soften things up for negotiations. Can’t have those who control the gulf also controlling golf, so a good PGA shakedown of Crown Prince Mohammed bin Salman’s sovereign-wealth fund makes sense.

Other past end-runs around real oil solutions by Biden have been equally effective:

Last summer, Biden officials held a series of talks with U.S. refiners as inflation was crushing consumers and gas prices hit historic highs. The White House at the time floated ideas like curbing fuel exports and forcing the restart of idle refineries, but those ideas have not been resurrected yet, the source said.

Sure, the drawdown of the nation’s Strategic Petroleum Reserve helped some to combat high prices, but been there, done that, and there’s not a lot more to draw down, especially if we want to be strategically safer from far more serious cuts in oil supply, which is the real purpose of that big, largely underground oil pool. The reserve is now at its lowest level in decades, so further draw down just to massage market prices could be strategically risky. And so much for now for the promise to refill it.

As for hiking higher for longer, another one of the lead stories todays lets us know the ECB is hot on it with another hike, and that the head of the ECB says to expect some hard times to come as a result of the continuing fight against inflation. For those who argue we are averting recession just because things are not that bad after one of the steepest (though not highest … yet) cycles of rate hiking in history, Sounding Line shows below how recessions almost never do start this quickly in the cycle. In fact, if we were (or are) already in the (as I see it) inevitable recession that the Fed’s hikes are going to cause, this would be the second-fastest plunge into a rate-hike-caused recession in US history!

So, be patient. It’s coming.

Or you can be like those who dream that we’ve escaped a recession because it isn’t clearly here yet, never mind two quarters of plunging gross-domestic income, two quarters of declining US tax revenue, months of an inverted rate curve, and a record high rate of corporate defaults. Never mind the lag time from the last cut to the final destruction that we were just told doesn’t exist anymore, even though it always did in the past. And certainly do not pay any attention to the three or four good bank busts we’ve already had. (It’s already getting hard to keep count.)