As WTI oil prices reached highs of $85 a barrel in October, the Biden administration has been doing everything it can to try to jawbone the price lower.
In April 2020, President Trump brokered a deal between OPEC members to cut back 10 million barrels a day of oil to support the price of oil. But prices have rallied beyond the level of last year, yet OPEC+ has been slow to release all those barrels back in the market as they are fearful to lose the steam of the rally. OPEC+ countries are massively benefiting from higher prices as it boosts their government spending plans, while the rest of the world, especially the U.S., is not happy about the rally as the oil price is now coming close to hurting the U.S. consumer.
This is when it gets serious for Americans: When gas prices at the pump are closer to $5 or $6 a gallon. Without the significant rally in wages or jobs returning and with inflation so rampant everywhere, Biden wants to avoid this strain on the consumer and the economy. His pleas to OPEC+ have not been heard, as they do not see the urgency in the same way the Americans do. And, why should they?
OPEC+ justification is that the price rally is slow and gradual and demand is stable, with there being no need to increase more or cut back as "price seems right." As of Tuesday, the Biden administration has suggested releasing a total of 50 million barrels of oil from the Strategic Petroleum Reserve and as much as 30 million barrels from Korea, Japan, China, India and the U.K. The total size of, say, 70 million barrels pales in comparison to the daily 100 million barrels a day in global demand. We are talking less than half a day's consumption at the most. The media and sell side may use this narrative to justify the fall in the oil price, but there is something more sinister developing underneath the surface. The macro side of the market.
Commodities are both influenced by micro as well as macro. We all know the micro side pretty well given the supply tightness exacerbated by OPEC+ holding back production at a time U.S. shale is unable to and does not want to produce more oil, lest they get blamed by their shareholders. After years of overspending, this time they are being prudent. Sod's law: It is at a time when prices are the highest, and when there is actually a need for it. So, OPEC+ seems to be in the driving seat, for now. But the macro has been deteriorating for a while as post the COVID-induced stimulus of last year, all asset classes are back to if not higher than pre-COVID levels, but oil demand is still below pre-COVID levels. Travel demand has not been fully restored and there are signs that China's economy has been slowing down quite hard over the past few months. This is relevant as most analyst assume the demand trends of the past can be extrapolated into the future without accounting for any disturbances. With parts of the EU going into lockdown as cases pick up with even the U.S. showing more and more cases, this is something no one is prepared for.
We all know that inflation is no longer transitory, but the million-dollar question is, just how long will it stay this high for? Even the Fed has no answer and it is just hopeful that it eases soon, as it cannot print more to boost the economy nor can it raise rates. The Fed's favorite inflation indicator -- core personal consumption expenditures "deflator" -- was released today and jumped to its highest since 1991 (headline PCE rose 5.0% YoY). The dollar has been rallying for the past few weeks now, and if it breaks higher, this can be a problem for all asset classes. These are some of the factors outside of just looking at inventories that are more relevant than the strategic petroleum reserve release per se.
Winter has not started in earnest, so it will be important to keep an eye on how cold it can get to gauge distillate and jet fuel demand over Q4. The oil market has always been about timing, there is no shortage of oil, but of course if we combine the coldest winter, the strongest GDP growth and lack of supply growth, a lot of ifs, then of course prices can rally. But one should never dismiss the macro momentum, either. We all know what happened in December 2018 when the Fed mentioned taper and asset classes took a hit. Let's see what the Fed has in store for the FOMC in December, now that Powell has been nominated for another term.
