by bitkogan
The connection is straightforward: a dip in inflation is largely tied to plummeting energy and food prices.
In July 2023, the average WTI oil price dropped 23.49% as compared with July 2022. Meanwhile, natural gas prices plummeted by 63.31%, and corn by 17.27%. Observing these figures, particularly for natural gas, makes one question the rise in the CPI. The answer there lies in persistent core inflation.
Should commodity prices, especially oil, pivot from dampening overall price growth to driving it, we could anticipate multiple rate hikes from the Fed. In June, WTI’s year-over-year decline stood at 38.54%, significantly greater than July’s. This partly explains why July’s CPI saw a 3.2% YoY growth following June’s 3.0%. As we step into August, WTI is a mere 10.07% down from the previous year. If this trajectory holds, the CPI could surge by 4-5% by year-end.
Higher oil prices not only hint at steeper rates, but also increase the odds of an impending recession—a bleak prospect for stocks.
So, will oil prices maintain their ascent?
The IEA predicts an unprecedented global oil demand this year—at 102.2 million barrels daily, with an additional 1 million slated for 2024. Even if we discount the IEA’s history of alarmist predictions, this forecast shouldn’t exactly come as a shock, especially when we recall that OPEC+ reliably curtails supply to bolster prices. In July alone, global supply shrank by 910,000 barrels daily due to Saudi Arabia’s decision to pull an extra 1 million from the marketplace.
And yet the IEA also anticipates that in 2023, non-OPEC+ supply will climb by 1.3 million barrels daily, dwarfing the cartel’s meager 160,000 increase. I’m inclined to anticipate that the market will soon face a surplus, stirring tensions within OPEC+ that will be reminiscent of pre-pandemic dynamics.
However, this development still likely lies a year in the future. Presently, the focus should be on gauging the authenticity of the demand resurgence, with China being the linchpin. Ascertaining the real situation in China always presents challenges. Although oil imports show signs of a revival, that metric doesn’t necessarily point to robust demand. China might have just been capitalizing on low oil prices to bolster reserves, a frequent tactic. With prices rising, their excess purchases may taper off.
In essence, while a resurgence to $100 per barrel is conceivable, it likely hinges on geopolitical tensions. A more plausible outlook suggests stabilization within the $70-80 range.