Broken record time: Experts say Oil should be priced much higher

Outlook

While we wait for Trump retaliation, which would be in keeping with his style (if he doesn’t chicken out), attention goes to the nutty stock markets and the price of oil. Broken record time—experts say oil should be priced much higher given the need to rebuild stockpiles and now the closing of the Strait again. But the oil gang is not cooperating with this longer-term outlook for its own reasons, including the fear of getting knifed in the back the minute the Strait re-opens. The move up in oil prices today is pretty small.

If the dollar is tracking the price of oil, if not quite one-for-one, and the price remains near pre-war levels, the dollar is soft against the majors. But these two have been moving in tandem of late and when oil shoots back up toward $100 again, it’s hard to see the dollar slump continuing.

The markets are indeed watching. Bloomberg even has a story on bond guys watching the crack spread. And the IEA points out “…an oil market that’s effectively split in two: crude markets are becoming well supplied, but refined product markets remain exceptionally tight. This ‘disconnect’ has underpinned the rally in cracks and refinery margins.”

Then there is the effect of oil prices on central bank policies. It’s far too soon to say what that is, but you can bet your bottom dollar the central banks are paying close attention. Oil prices permeate everything and it’s well nigh impossible to consider a hold, let alone a rate cut, under current circumstances. Whether oil pushes up inflation expectations and yields is yet to be seen. The best case scenario would be TACO and the re-opening of the Strait, toll or no toll.

ING yesterday had an essay on why the ECB is likely to hike again in September. This is a serious issue being handled seriously by seriously qualified officials. Given the uncertainty over what the Fed will do in September, even though it looks like it will hike, too, this forecast reduces the expected rate differential now favoring the dollar. So, if it’s a consensus viewpoint, it may account for the otherwise somewhat surprising muscle in the euro.

Forecast

The continuation of the consolidation favoring the majors over the dollar was bigger than we thought it would be. It also runs counter to the Big Picture factors—US resilience and robustness, high yields, etc. It may speak to the deep desire to get as far away as possible from the toxic Trump. But it’s not really capital flight in any meaningful way despite the wish to de-Americanize. That’s a far longer process. In the meanwhile, the dollar is still the safe haven currency and resumption of war plus a rising oil price “should” give it a tailwind.

Food for thought: Fed chair Warsh has named the private sector guys to head up his committees to research and make recommendations on policy going forward. They include former Walmart CEO McMillon; Marc Andreessen, and Asha Sharma, the EVP and Xbox CEO at Microsoft.

Two things: we have been struggling with Microsoft for decades, along with millions (not thousands, millions) of others. Do we really want anyone from Microsoft having anything to do with the Fed?

Second, the brainy back office economists may be far too abstract for us mere mortals—just try to read one of their papers—but they are well educated, well-informed, work hard and have the Boy Scout mindset. Why not give them a chance before bringing in outsiders? They must be steaming. One thing we can say for sure about the high-end corporate execs—they do not have the Boy Scout mentality.

Fun tidbit: Bloomberg just had advice for Americans seeking to leave for the UK. See the chart. Three guesses what are the expats’ reason.