Based on the Consumer Price Index, a tool used to measure inflation, there was a 6.2% increase in the cost of all items over the past year. The sharp spike in inflation was due to energy, shelter, food and vehicle costs.
Compared to a year ago, it was the highest inflation rate in the United States since 1990. Inflation is now at a 30-year high.
Most analysts blame rampant inflation on rising crude oil prices. In April 2020, crude oil prices were as low as $31 a barrel, but the final week of October, less than a month ago, crude rose a bit over $85 a barrel.
Over the years I have dubbed crude as “the stick that stirs the drink.” And that is simply because history shows “as crude goes, so go most commodity markets,” thus leading to inflation.
The largest state in the nation by population is California. It has the highest cost per gallon of gasoline. According to the U.S. Energy Administration, crude accounts for about half the cost of a gallon of gas. A week ago, the highest record average price per gallon in California was $4.67.
The national average is pegged to be $3.41. And the highest recorded average price was set in October 2012 in the Los Angeles metropolitan area of $4.70 a gallon.
This week, crude oil prices tumbled badly and nearly hit $76 a barrel, a level not seen since Oct. 7. Some are now screaming loudly that crude has topped out and is headed lower and a host of other commodity markets will follow suit.
Yes, in a month, the crude oil market got a haircut to the tune of $9 a barrel. But is the bull run over?
Goldman Sachs, a highly regarded and widely followed multinational investment bank, is still calling for $90 per gallon crude oil. As always with forecasts, they may be right, or they may be wrong. I would bet, however, that $90 crude will lift a number of commodity markets higher yet.
And then there is the Bank of America with its outlook for Texas Tea prices. According to CNN Business, “Bank of America is now predicting that Brent crude oil, which drives gas prices, will zoom to $120 a barrel by June 2022. That’s 45% higher than current levels. Francisco Blanch, Bank of America’s head of global commodities said, ‘It’s very easy for prices to shoot up when demand conditions are tight like they are now.’”
In that article, Blanch argues that pent-up demand is powerfully strong because of the COVID pandemic. Plus, supplies of crude are tightening.
The United States is producing less oil now than it did before COVID even though prices are much higher today. All that is because Big Oil in the past overspent on expensive drilling projects and watched crude oil prices collapse. Big Oil reduced drilling accordingly and prices are now shooting higher.
Have crude oil prices actually collapsed in recent years to cause Big Oil to slow drilling? Judge for yourself: In 2008, crude prices kissed $147 a barrel and quickly rolled over and headed south. In April 2020, crude fell to $31 a barrel.
However, it was actually far more bearish than that. Here is the rest of the story.
From the U.S. Energy Administration from Jan. 5: “In the first half of 2020, responses to the COVID-19 pandemic led to steep declines in global petroleum demand and to volatile crude oil markets. The second half of the year was characterized by relatively stable prices as demand began to recover. As petroleum demand fell and U.S. crude oil inventories increased, West Texas Intermediate crude oil traded at negative prices on April 20, the first time the price for the WTI futures contract fell to less than zero since trading began in 1983. The next day, Brent crude oil, another global crude oil price benchmark, fell to $9.12 per barrel, its lowest daily price in decades.”
There is no doubt that one of the main reasons crude prices are spiking higher is because Big Oil did not drill for oil because they watched prices collapse from $147 a barrel to zero. As a result, crude prices are now rising like the proverbial phoenix, a bird that burns to death and is reborn from its own ashes.
The globe is in the early stages of a commodity supercycle. History suggests such a scenario is generally led to the upside by crude oil prices. With crude now trading around $76 a barrel, I remain bullish commodities. If crude jumps to $120, I will be more bullish yet.
The crude oil market reminds me of the phoenix, that mythical bird that rises from its own ashes. And that same comparison can be used for the commodity supercycle that is well underway and will linger for a long time. Inflationary pressures will not go away anytime soon.