A few weeks ago, we heard the Federal Reserve say that their favored inflation gauge, the Personal Consumption Expenditures (PCE) dropped from last month. This led to financial media and markets declaring that inflation has peaked. I myself looked at the data and saw that the Fed said the PCE dropped because oil prices fell. Since then, oil prices have headed higher and the chart has indicated a breakout.
The drama increases with OPEC+. Biden began a price war with OPEC+ last year. It worked for the first few days but then oil prices shot back up. This year, the US and other countries came together to dump oil reserves (even from their strategic emergency reserves!!) in an attempt to flood the market with more supply to decrease oil prices. After two unsuccessful attempts to lower oil prices, OPEC+ is finally indicating that it will help out.
OPEC has finally bowed to months of pressure from major consumers to help ease the pain of high energy prices. OPEC+ will increase the size of its oil supply hikes by about 50%. Ministers have agreed that the group will add 648,000 barrels a day of oil to the market in July and August, up from 432,000 barrels a day. No nations were named as they wanted this to be private. I think we can safely say it won’t be Iran or Russia because they don’t want to do the US any favors. The nations likely will be the UAE and Saudi Arabia as they have significant capacity to ramp up quickly.
A few analysts are already doubtful about reduction:
“With only a handful of… OPEC+ participants with spare capacity, we expect the increase in OPEC+ output to be about 160,000 barrels per day in July and 170,000 bpd in August,” JP Morgan analysts said in a note.
But wait there’s more. This is one of those “don’t listen to what people say, but what people do”. OPEC+ words to reduce prices contrast with what the Saudis are doing. Right after the June 2nd press conference, the Saudi’s said they will boost their official selling prices for July for customers in Asia and Europe. Saudi Arabia raised the July official selling price (OSP) for its flagship Arab light crude to Asia by $2.10 from June to a $6.50 premium, the highest since May.
So is this just all talk from OPEC+? We will have to wait until summer, which tends to be the best months for oil. Maybe this year, people won’t drive as much as they try to save money from rising inflation. There is also China to consider. China is reopening some cities that were under a strict two month lockdown. Chinese demand will increase… and supply might not be there if OPEC+ really does cut. Everything just points to higher oil prices.
When OPEC+ announced cuts in Summer, oil prices actually popped. There was a drop initially, but traders then bought the dip. I personally think it was because of the technical level we were testing. $115 was a resistance level that was taken out earlier last week. June 2nd saw buyers jump in and defend $115 with strength. A nice follow through to end the week.
In terms of technicals, everything here points to higher prices as long as we remain above $115. Working with this breakout, we should expect to see the 2022 highs of $129.42 being tested. And then if we close above that…
You need to zoom out to the monthly timeframe to see what comes next. Yes. We would then be targeting previous all time record highs on oil. New record highs anyone?
What does this mean? Inflation has not peaked. If oil prices continue to rise, this will affect transportation costs for goods, including food. The extra costs will be passed onto the consumer in the form of higher prices. Inflation will continue to come in higher.
Once again, the Federal Reserve has two choices: Either raise rates MUCH higher to tame inflation but risk crashing the economy because everyone is used to cheap money. Or pause rate hikes in order to prevent a crash in asset prices and the real economy, but watch inflation run away.