Oil at $100?
The energy crisis from Asia to Europe and a cautious OPEC+ in restoring supplies sent Brent crude 17% higher since September. On Tuesday, Brent crude touched a three-year high of $84.60 before settling at $83.65, while US WTI made a seven-year high of more than $82 a barrel.
Oil markets are tightening rapidly, and there are no signs of this easing as we head into the winter season. Moreover, shortages in natural gas and coal supplies will not disappear soon, and this will continue to add some upward pressure on oil prices. Add to this the speculative positioning by traders on fear of missing out, and the $100 target does no longer seem out of reach.
OPEC+ could prevent such a scenario if its members decide to open the taps, but is there willingness to do so? The US administration is likely to continue pressuring OPEC members to increase supplies and possibly tap into its strategic reserves to keep prices in check. Higher gasoline prices will further drag Biden’s approval rating, and he certainly wants to avoid further turmoil in such critical times.
The pandemic is now in the back seat regarding investors’ biggest concerns as inflation fears took the lead. The argument for inflation turning to be structural is becoming more potent than that of transitory. It’s not just skyrocketing energy prices, but many of the industrial materials are hovering near all-time highs. In addition, US wages continue to rise steadily given the shortages in the workforce, and usually, wages are stickier than other inflationary components. Businesses are also challenged with higher input prices and expect to see this reflected in their earnings calls over the upcoming several weeks.
It will be interesting to see how bond markets react to inflationary concerns. Last week US 10-year Treasury yields rose above 1.6% despite disappointing non-farm payrolls report. Another sharp spike in yields will further threaten bulls in equity markets, so keep a close eye on Wednesday’s US CPI release and where do yields move from here.