Oil and Inflation

Energy price increases seem to be a large part of CPI growth. Many analysts are calling for even higher oil and fuel prices this summer. Demand is increasing, for now, supply remains constrained, and politicians are mostly finger-pointing. Let's dig into Oil and Inflation.

Energy & CPI

Well known economist David Rosenberg points out that much of the CPI gain is energy related.

Is this good news? If it's a demand issue, then maybe rate increases can help. It it's a supply issue, then perhaps not so much.

Demand

The U.S. Energy Information Administration estimates that "global consumption of petroleum and liquid fuels will average 99.6 million barrels per day (b/d) for 2022, a 2.2 million b/d increase from 2021, and 101.5 million b/d in 2023.

What's might be driving increased demand?

US consumers are getting ready for summer travel, amid less concern for COVID. Across the globe, China lockdowns are easing - oil imports increased in April, after falling for three months.

China oil imports rebound in April, but weak fuel demand weighs on refiners

China’s crude oil imports grew nearly 7% in April from the same month a year earlier, its first rise in three months, although weakening fuel demand due to COVID-19 lockdowns has dampened throughput at Chinese refineries.

ReutersChen Aizhu

Supply

Per the Financial Times and Rapidian Energy Group, there is more than meets the eye in the touted OPEC supply increase. Some of the planned increases in production were already planned for later in the year. Smaller OPEC producers are struggling to meet demand. All in all, Rapidian estimates 355k b/d increase in supply.

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Financial TimesDerek Brower

The International Energy Agency initially estimated a loss of 3 million b/d loss due to sanctions on Russia, although has revised those estimated to 1 million b/d

Energy watchdog does a U-turn, saying world can withstand loss of Russian oil supply

The world will not be left short of oil even with lower output from sanctions-hit Russia, the International Energy Agency said on Thursday, in a U-turn after it predicted a possible “global supply shock” in March.

CNNReuters

Shale capacity in the US does not appear to be taking advantage of higher prices. The industry has $150bn of accumulated debt to pay off, so levering up further to fund new projects seems unlikely.

US shale producers aren’t cashing in on soaring oil prices as skittish investors shy away from new drilling projects

Skittish investors — burned before by shale drillers who had aggressively ridden past oil booms — are behind the lower production levels, as they lobby producers to prioritize debt reduction.

Markets InsiderEthan Wu

Refining capacity is down. You need refining to convert oil into usable fuels. Driven by COVID demand shock and green energy initiatives, perhaps as much as 1 million b/d of refining capacity in the US is now offline.

EIA expects high refinery margins to contribute to increasing fuel production this summer

U.S. Energy Information Administration - EIA - Independent Statistics and Analysis

Government Response

Out of Washington come recycled talking points on both sides. The left is blaming energy companies.

Facing record inflation, Biden chides Exxon, oil companies for profits

U.S. President Joe Biden on Friday accused the U.S. oil industry, and Exxon Mobil Corp in particular, of capitalizing on a supply shortage to fatten profits after a report showed inflation surging to a new 40-year record.

ReutersTrevor Hunnicutt

The right is blaming reductions in domestic production. Think Keystone pipeline.

Neither side has any good ideas. Perhaps less government intervention is the answer.

Any opinions or forecasts contained herein reflect the personal and subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. The accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.