The Macro Brief: "Prices Will Stay Volatile In The World Of Commodities," According to Kuemmerle
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This is an exclusive piece by Lukas Kuemmerle (LK Research) for The Macro Strategist community. We strive to offer differing opinions from thought provoking individuals and enjoy. Following this will include an update on XLE for Pro subscribers. Enjoy!
As you probably noticed, energy prices have been soaring dramatically over the past months and especially fossil fuel inventories are getting scarcer and therefore more expensive. We, as consumers, can definitely feel these price increases in form of less purchasing power, measured via the Consumer Price Index.
The latest May numbers showed a YoY inflation rate of 8,2%, which is huge because many “younger” generations, like me, haven’t felt that amount of inflation in their lifetime yet.
The cost of energy has a significant impact on the monthly CPI print. Just keep in mind that energy means life. Higher natural gas prices lead to higher fertilizer manufacturing costs in the grain sector which leads ultimately to higher grain prices themselves.
Then you need to fill up the tanks of the farmer’s tractor with diesel, which is again another form of refined oil. Or think about how propane is heavily used by farmers to dry grain to reduce moisture and make the product adequate for storage. Fossil fuel is therefore still necessary for food production.
The oil price itself was, over the last decade, the single best indicator for tracking inflation adequately.
Talking about oil. There are fundamental reasons behind the rapid price increase. The problem here is that inventories are very low, production is slowing, not growing and investments in the oil-producing industry aren’t that popular anymore. Companies have to digest and allocate more of their CAPEX into renewables; however, they’re using also big parts of their earnings to pay higher dividends or buy back more shares in order to increase the shareholder value.
Investing in oil drilling activity just isn’t that attractive anymore for a corporate decision-maker, which means bad news for the worldwide oil supply.
In order to curb oil and gasoline prices, the Biden legislation released large amounts of the strategic petroleum reserve. In actual numbers that means that 1 million barrels per day will be added into the market, over a time period of 6 months. (now 4 more months to go)
If you do the simple math, as I did in the following chart, you quickly realize that there is nothing but upside for oil prices, under the premise that we won’t get a strong recession in the US.
Meanwhile, this does not necessarily have to mean even higher inflation in the near future. This is because the CPI is measured via year-on-year change. So ultimately, it’s all about the rate of change.
There is only one thing I know for sure and that is the fact that prices will stay volatile throughout the world of commodities.
