Rising oil prices should not lead to runaway inflation

After a fierce rally, oil prices have recently fallen, falling for two days on a possible de-escalation of the Ukrainian crisis and the resumption of talks on the Iranian nuclear. March WTI crude (CL1:COM) slipped -2.1% on Tuesday to $89.41/bbl, with April Brent (CO1:COM) falling a similar margin to trade at 90, $75/bbl.

French President Macron says he has received assurances from Vladimir Putin that there will be no “escalation” of Russian pressure on Ukraine, while Iranian diplomats and world powers have gathered in Vienna to seek an agreement reviving the 2015 nuclear deal.

But while geopolitical optimism has prompted profit taking, OANDA analyst Edward Moya says the price weakness is likely to be short-lived while the oil market remains in short supply.

Oil prices are still trading near seven-year highs, and the Biden administration is feel the pressure to reduce inflation— the quickest way to do this would be to lower energy prices, as Robert Yawger of Mizuho said MarketWatch.

But another Wall Street pundit now says that while high oil prices are likely to weigh on the economy, another powerful force will keep inflation in check.

Maverick stock picker Cathie Wood’s ARK Invest (NYSEARCA:ARKK) said in a webinar that advances in technology will likely increase productivity rates, outweighing any wage gains.

“We are confident that the productivity gains we will see over the next five to ten years will be astonishing. We believe that productivity will increase by more than 5% and that we will not have an inflation problem.,” she said.

Wood remains one of the few top fund managers to say that deflation, rather than inflation, will be a driving force in the US economy and stock market over the next few years. ARK Invest has become famous for being a little contrarian betting on high-value, high-growth stocks that soared at the start of the pandemic. Indeed, the ARKK portfolio appears vulnerable to further declines in tech valuations due to its overweight in high-multiple stocks.

ARKK’s five main holdings are: Tesla Inc. (NASDAQ: TSLA), Teladoc Health Inc. (NYSE: TDOC), Zoom Video Communications Inc. (NASDAQ: ZM), Roku Inc. (NASDAQ: ROKU), and Coinbase Global Inc. (NASDAQ: CURRENCY).

ARKK is down 23.5% year-to-date and down 52.8% over the past 52 weeks.

Bullish High Inflation for Oil?

Stimulated by a massive restocking of stocks and cash-strapped consumers, the US economy grew last year at a blistering 6.9%, its fastest pace since 1984.

But analysts warn that the rosy times are over.

A lingering pandemic, a tailwind of fiscal stimulus, and a Federal Reserve that has gone from the simplest policy in its history to warmongering inflation fighters will make growth much harder to achieve in 2022 and beyond.

Growth is expected to slow sharply in 2022 as fiscal support fades and, in the near term, the spread of the virus weighs on services spending and prolongs supply chain disruptions. Growth in the first quarter is expected to be particularly weak as the fiscal slowdown will be accompanied by a hit from Omicron,“said Goldman economist Ronnie Walker in a note to clients.

GS cut its full-year GDP growth outlook to 3.2%, well below the current consensus of 3.8%.

Meanwhile, soaring energy prices heavily blamed for runaway inflation.

As the US Department of Labor prepares to release January Consumer Price Index figures on Thursday, inflation data is expected to show prices rose 0.4% in January, for a gain of 7.2% compared to a year ago, which would be the highest in nearly 40 years. The reading follows a stronger-than-expected January jobs report, which led to speculation that the Federal Reserve could be more aggressive in raising rates.

Fortunately, the oil-inflation link has weakened considerably since the 1980s.

For example, during the 1990s and the Gulf War oil crisis, inflation remained stable despite crude oil prices doubling in six months from $14 to around $30. This decoupling between the two metrics became even more apparent during the The rise in oil prices from 1999 to 2005 when the annual average nominal price of oil rose from $16.50 to $50 while the CPI rose by a much smaller margin to 196.80 in December 2005 against 164.30 in January 1999.

The price correlation between crude and gasoline has changed a lot over the years and in a way that does not favor the consumer. Most states have raised gasoline taxes, refiners are facing new rules that are driving up costs, and there’s a shortage of drivers for the trucks that deliver gasoline to gas stations.

The relationship between high oil prices and high inflation is therefore not as simple or straightforward as in the past.

Indeed, some pundits have even made the somewhat devious argument that high inflation and a weak dollar will drive oil prices up, not the other way around.

Timely LLP says that the US economy is heading towards pandemic-induced hyperinflation, arguing that what took five years to do with the last QE has now been duplicated in less than a year. Analysts say that with such a rapid expansion of the money supply, it is only a question of when hyperinflation will hit.

Source: JD Supra

Analysts say their models currently value West Texas Intermediate (WTI) crude oil in the $90/bbl range.

But this is where it gets interesting: Experts say that given the government’s insatiable appetite for spending, the dollar could be subject to a massive devaluation that will propel WTI prices north of $180/bbl d by the end of 2022.

We are not entirely optimistic about these ultra-bullish projections for the simple reason that they would not be welcomed by the Biden administration.

According to oil analyst Patrick De Haan of GasBuddy, hundred dollar oil today could bring us closer to the $4 per gallon mark. The $4 threshold is seen as an undeniable pain point for drivers, with $4.17 being the all-time high for gasoline prices after oil prices hit $145/bbl in the summer of 2008 .

By Alex Kimani for Oilprice.com

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