Oil prices have increased since the lows in early 2016, and the upward trend has intensified since 2017. It is no oil crisis, and we are certainly nowhere near the peak of $145/barrel in June of 2008. Remember filling up your SUV back then?
We care because higher oil prices are yet another headwind to economic growth, a headwind that is getting stronger. Outside of the obvious impacts of higher gas prices and the cost to heat your home in winter, higher oil prices work their way through the economy as petrochemical cost increases and transportation expenses, and eventually end up causing higher inflation. We know the Fed likes to call energy and food price fluctuations transitory, but the flu is also transitory and certainly not pleasant!
Of course, higher oil prices help oil producing countries like Saudi Arabia and Russia. Though the U.S. is certainly producing more oil these days, we are still a net oil importer.
Chart: West Texas Intermediate (WTI) Crude Oil Price
Unfortunately, on balance higher energy prices are an economic drag and we can see these headwinds increasing. As a basic commodity, oil should settle at the marginal cost of production, which many think is around $65 per barrel. But in the short term it’s all about supply and demand, and for the foreseeable future the concern is about less supply and a continued increase in demand.
There are three major areas of concern around supply. Sanctions imposed on Iran starting in November will reduce supply from this large oil producer, Venezuela production continues to fall rapidly due to political turmoil, and supply growth in the U.S. may be less than expected due to pipeline and technology issues.
Related: An Important Year for Bond Investors
Demand growth is still expanding around the world, mirroring strong yet diverging world GDP growth. The U.S. is growing above trend, China’s growth is lower but still likely above 6%, Europe is still positive and Japan, while weak, is still relatively stable.
Continued growth in demand with tighter supplies would not be so big an issue if oil inventories were overflowing and there was plenty of excess production capacity in Saudi Arabia, the world’s swing producer. Alas, this is not the case; Saudi Arabia is already producing at record levels, with less excess capacity after years of lower prices and less investment. So, with supply constrained and demand still growing, the way to bet is for oil prices to go higher.
Time to fill up your gas tank!
Sources: Energy Information Administration, Bloomberg, the Financial Times, International Energy Agency
Does Your Money Intention Match Your Money Attention?
The 10 Advantages of Becoming More Emotionally Intelligent
A Tool That Helps Prepare Vets for Civilian Employment
The One Behavior to Make a Difference in the Ability to Impact the Lives of Others
8 Tips for Delivering Your Portfolio Manager Commentaries Faster
Who Are You Serving?
Your To-Do List Won’t Suffer When You Do This Too
How to Budget for the Holidays
2019 Will Be a Pivotal Year for Asset Managers
An Employee Advocacy Program Can Make Your Content Go Viral
Equities23 hours ago
These Oil Stocks Are Ticking Time Bombs
Building Smarter Portfolios23 hours ago
The Market’s Wild Ride
Human Performance23 hours ago
5 Simple Ways to Improve Your Productivity At Work
Equities2 days ago
Bubble, Meet Pin; It’s Just the Beginning of the Downslide
Market Strategist2 days ago
Don’t Be Boxed Into Style Boxes
Development2 days ago
As an Advisor, Are You “The Great Communicator?”
Equities3 days ago
This Is the End of Trump’s Economic Sugar High
Development3 days ago
When You Cannot Think of a Better Way to Market Yourself, Try This…