Dr. Kenneth Rietz
July 19, 2023
Since mid-November 2022, the price of crude oil has consolidated in the range of $65 to $85 per barrel. This is rather remarkable, since there have been numerous significant events in that interval which would normally send those prices significantly higher or lower, depending. These events range from OPEC+ reducing oil output (which used to send the price way up, for at least a short period of time) to major market drops (which caused a drop in crude also). Mister Market now simply ignores such signals, waving calmly within its range. This very point has been asserted by the Saudi energy minister recently. Let’s look at this more closely, considering several significant events and why they might fail to have a big impact on crude oil prices. The chart below uses daily HLC (High-Low-Close) bars crammed together, with the green ones being bullish and the red ones being bearish.
The largest single influence on global crude oil prices arguably is the OPEC+ output announcements, the latest being the decrease in output by Russia. The last round of oil production cuts had Russia cut production by 500,000 barrels per day (b/d). Instead, Russia actually increased production. It is very realistic to assume that no production cuts will happen this time either, and traders logically ignored the announcement. It is possible that Mister Market is settling on being cynical regarding OPEC announcements.
Another major influence is the estimation of global usage of crude oil. Both OPEC and the International Energy Agency project a global increase in crude oil used by 2.1 million b/d. However, China is projected to have 800,000 b/d of that. It is unlikely that China will even use as much crude oil next year as this year. China might want its economy to appear healthy, but plenty of data coming out of China paint a different picture. Even official figures are concerning, some grim. The annualized production for the second quarter was a bit less than 3%, down from the first quarter figure of 9%. Housing prices declined by 0.2% in the first quarter, and 2.2% in the second quarter. Remember that housing is a standard method for the Chinese to use as savings. While exports last June were unusually strong, they are down 12% this June from last. Youth unemployment is 21.3%, the highest since that statistic has been collected. Car sales are up, but still, economists are beginning to use the word “deflation” about China. When the world’s second-largest economy is struggling that much, it makes some sense to think the demand for crude oil might not go up at all.
But what about the United States, the world’s largest economy? Depending on where you look, the economy could be sailing along, or sputtering. Since inflation annualized at 3%, some want to think that the recession is fading, that the Fed won’t increase rates anymore (contrary to what they have said), and that we are experiencing the mythical soft landing. The economy will then grow, and crude oil will be needed for this expansion. Mister Market seems to disagree, as do a significant number of economists, and not just permabears. The optimists seem to have forgotten the lesson that tripped up the great Paul Volcker. By ending his war against inflation too soon, inflation came roaring back, to a disastrous level. Jerome Powell is painfully aware of this sequence of events and will not permit it to happen again. Expect another rate hike or two, and no decrease in the rate for quite a while. Accordingly, don’t expect an increase in crude oil usage in the US.