Black Gold Price Stability must for inflation control
Global markets remain on edge as crude oil prices swing amid escalating geopolitical tensions.
I have written several articles on the appreciating price of the shiny metal – Gold. But in the past few days another kind of gold has dominated the headlines due to its sharp spike in price. I am referring to Black Gold – Crude Oil
Just see the charts – on March 9th back Crude Oil prices spiked to 120$ - now at the time of writing they have deflated with WTI crude at 85$ with Brent around 88$.
Crude Price Volatity visible as WTI price settles from 119$ Spike …now at 85$!!
Crude Price Volatity visible as Brent price settles from 120$ Spike …now at 89$!!
This volatility in crude prices signals an evolving geopolitical situation, with markets trying to assess whether the recent tensions in the Middle East will escalate or ease.
It is stormy skies in Macro Economy, and of late it’s been undergoing a lot of Macro Economic Stress.
Middle East War leading to Bottlenecks in Crude Oil Trade Movements & Price instability
On Jan 8 – Price of Brent Crude was 60$ and of WTI 58$, since then prices have been rising as visible in charts.
The price increases have been in responses to events affecting oil supply rich countries – starting from USA under President Trump initiating hostility in Venezula with the arrest of President Manduro. Post that USA and Isreal went offensive on Iran, which has triggered retaliatory hostilities with Iran destroying USA supporting military bases in Isreal and Middle East.
Recently Iran closed the Strait of Hormuz – through which Middle East Oil Producing Countries Transport Crude Oil through tanker ships. This has disrupted supply-chain of Crude Oil – with Crude Oil trade halted in this route.
Oil Producing countries – Qatar, UAE, Kuwait, Iraq, Saudi Arabia have halted production of Crude Oil, with Crude Oil Supply filled in storage.
The conflict has resulted in some oil storage facilities in Strait of Hormuz – been hit as target – resulting in destruction of some Energy Infrastructure.
The escalation of conflict across parts of the Middle East has affected crude oil production and created logistical constraints in global oil trade, worrying financial markets.
This led to a sharp spike in crude oil prices.
On Tuesday Crude Oil Markets deflated suddenly responding to President Trump’s Statement that the war would soon end.
However, there is no certainty about these hostilities ceasing leading to Iran agreeing to opening up of Strait of Hormuz.
The Crude Oil Price scenario is contingent on this.
Inflation Fears visible in Market reaction to spiked up Crude Oil Prices
When the price of Yellow Gold rises, investors often benefit as they move capital into gold to preserve wealth during periods of economic uncertainty. However, when the price of Black Gold rises, it usually brings economic pain.
This is because Crude Oil Prices are the invisible tide of inflation – once Crude Oil Price increases, cost of products and services increase.
Crude Oil is the fundamental Brick for economic activity needed as fuel to operate machinery in factories, for freight vehicles transporting commodities, fuel for retail motor vehicles, Aviation transport and more.
Market inflation expectations are often reflected in bond yield movements.
Just notice Yield movements of US, Canada and Britain 10 Year Bond –
US10Y have increased from 3.9% to 4.185% from March 2 to 6th. It has fallen currently now to 4.121% due to decline in Oil Prices
US Long-term Bond yields rising with Oil Price – shows Market having Inflation concerns
GB10Y has increased from 4.240% to 4.731% during Feb 27th to March 2th period and has fallen to 4.588% as oil price declined
German Long-term Bond yields rising with Oil Price – shows Market having Inflation concerns
CA10Y has increased from 3.124% to 3.425% from Feb 27th to March 6th period and has fallen t0 to 3.365% as oil price declined today.
Canadian Long-term Bond yields rising with Oil Price – shows Market having Inflation concerns
10 Yr Bond Yields are used to monitor Market sentiments on inflation. Investors sell off their long-term Bonds when yields don’t pay off for the value erosion caused by inflation. As Bond prices decline their yields rise, to pull in buyers.
Evaluation of 10 Yr Bond Markets – reveal a pattern that show the underlying fear markets have of impending inflation.
Fed Faces Policy Dilemma as Inflation Risks Clash with Weak Job Data
Another trending news is on signs of weaking US Job Market with declining employment as Payroll Data of Feb showed jobs declined by 92,000 compared to expectations.
This is interpreted as a symptom of slowing growth of US economy.
During times like this the common expectation from US FED is to undertake Rate Cut measures to stimulate economic activity. The general effect of this is known to be – Companies scale up their business operations availing low-cost credit and hire personel.
Unfortunately, it is not a straightforward scenario to implement rate cuts as current US inflation is already above target of 2%. Increasing oil prices add more inflation burden which when coupled with a declining Job Market – is a Red Flag which shows Stagflation forces at play. This is a scenario – of increasing prices, low wages and unemployment.
The price of Black Gold stabilizing or spiraling out of control is contingent on evolving conflict playing out in the Middle East. The world now watches closely as events continue to unfold.
Image Credits –:
- Banner created by me using Canva
- All Price Charts are from Trading View