As I sat early this morning gathering my thoughts, news hit the screens that Brent crude had just broken above US$ 90.00/pbb. And a quick look at the charts indicates that there is now little in the way of the prevailing price momentum driving it above US$ 100.00. This has certainly caught me off-guard as I had just a week ago thought markets to have been overbought and set to trade lower. Well, I guess one can’t get it right all of the time. I understand storage capacity to be high and therefore inventories to be low. Consumers appear to have little to fall back on which clearly gives producers the whip hand.
The great decarbonisation drive which has dominated the political discourse, and which not so long ago also had markets believing, is currently looking tired. The realisation that “defunding” the oil sector was going to change the world looks evermore like the little child which covers its eyes and convinces itself that it can therefore not be seen. There are many such lessons from history, many of which were very painful. I am always reminded of the Unites States Air Force which in the early 1960s decided that air war was in the future going to be fought with rockets only and it therefore removed guns from its aircraft. Nobody else had read that script and pilots in Vietnam quickly found that the planners in their absolute certainty had deprived them of any meaningful form of defence.
Thus, it is that my own holdings in the oil industry in which I believe have performed more than well enough to compensate for the losses in renewables which I took onboard at the urging of my investment manager. Phew! Calling oil has always been a game of three-dimensional chess which with the ongoing shift in the geopolitical balance of power has, however, just morphed into a four-dimensional one. But over time, owning oil has never been a bad idea. And my guess is that that is not set to change, as much as protestors demand and politicians behave.
When the Federal Reserve’s monetary policy-setting committee, the FOMC, convenes today for its two-day meeting, all members will be clearly cognisant of the dual pressures of the sharply rising oil price, up 30% since June, as well as the all-out strike by the Auto Workers’ Union (AWU). Markets had, before either the strike or the increasing momentum in the rise of the cost of oil had been in anybody’s sight, decided that the Fed was set to pause in the current tightening cycle. My guess is that most of the committee members would instinctively love to put another 25 bps on the current target rate for Federal Funds of 5.25%-5.50% although with markets skittish and the economy still not stable they will be loath to scare the horses. My suggestion is that tomorrow they will in fact announce that rates will remain on hold, that they are not entirely happy with the inflation trajectory and that they will be carefully tracking the data.
The longer I watch central banks, the more I wonder what this pathological repetition of “data dependency” is all about. What else do they base their policy decisions on? Holistic monetary policy doesn’t have too good a track record, living proof of which is Fed Chairman Jay Powell’s disastrous disregard for the data when he pronounced the rise in inflation to be merely transitory. Another case of the child with its hands over its eyes?
I guess the principal victim of the C-19 pandemic, although it ended up causing the death of only a fraction of the people it had originally been predicted to, was the socio-economic cloud cuckoo land in which both politicians and voters as well as investors had been living. The reality check has been chastening. Or maybe that should read “is” rather than “has been”. I don’t think the period of volatility and mental reset is over.
Last week, I received an email from a UK-based wealth manager. He wrote: “What happened to supply rises to meet demand?” OPEC may be cutting but Saudi is reported to have seen a drop in oil revenues from its self-imposed cut. This is costing them dear while the US, Canada and the UK are now granting licences and pumping as much as they can. Even Iraq may increase production despite corruption and OPEC limits. The big story is that rising wealth in the Developing World is creating increased demand, but even this can be choked off by expensive energy. Things may not be as bad as you fear.
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