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- The Department of Labor released an update of the U.S. consumer price index, which indicated an increase of only 0.2% for December. The previous report indicated an increase of 0.3%. While the news was seen as positive, the issue remains that core inflation (excludes food and energy) was unchanged at 0.3% – a level that is nearly twice the target rate of the Federal Reserve – even after the steep rise in interest rates. As such, the Federal Reserve will either have to change its view on the acceptable level of inflation or keep interest rates higher for a longer period than currently expected by the market.
- The S&P 500 broke though the 5,000 level for the first time ever. It took less than three years to reach this milestone after breaking 4000 in April 2021. The equity markets in the U.S. have been moving upwards steeply since the Federal Reserve indicated that there would be no further rate increases during this tightening cycle. On Oct. 23, 2023, the S&P was at 4117.37 and ended last week at 5026.61. At least some of the increase can be attributed to the market expecting that the Federal Reserve will cut rates multiple times during 2024, which brings us back to the issue raised in the previous bullet point – keep rates higher for a longer period or accept a higher core inflation. The Federal Reserve has also indicated concerns about the labor market with wages increased by 0.6% on a month-to-month basis. This situation, however, may be self-correcting, given that coupled with the wage increase was a significant decrease in hours worked.
Offsetting the positive news about the U.S. economy are the ongoing concerns about the Chinese economy. The latest official PMIs for China indicated that China’s manufacturing sector contracted for the fourth straight month with the reading for January coming in at 49.2. The PMI for the non-manufacturing sector came in at 50.7, which indicates only mild expansion. In contrast to the U.S. equity markets, China’s CSI 300 Index has lost around 40% of its value since the highs of 2021. Also, China is still facing a debt-laden real estate sector, which represents around 25% of China’s GDP. The situation will not be made easier because of China’s demographics. The IMF recently released a report indicating that demand for new housing in China will decrease by 35% to 55% over the next decade, which means it will be more difficult to reduce the oversupply of housing inventory.
The failure to reach a ceasefire in Gaza provided some support for oil prices; however, the flow of oil has not been interrupted. As long as the U.S. and Iran do confront each other directly, it is our view that the risk of disruption to the delivery of oil to markets will remain limited. Additionally, it is our view that the current situation centered around Gaza will start to deescalate over the course of the next month or so. One way or another – we think the fighting will end in Gaza during this period through negotiations, in part, because of internal and external pressures on the Israeli government. Not only will the pressure increase on Israel the pressure is increasing on the Biden Administration with calls for a ceasefire coming from several factions that are important source of support for the democrat party, including the progressive members in Congress, political leaders of democrat-led cities and black pastors. In response, the Biden Administration is putting pressure on Israel. Feb. 8, the Biden Administration issued a memorandum that requires allies receiving military aid to provide assurances that they are adhering to international law. Israel has 45 days to respond.
As geopolitical developments recede, supply/demand fundamentals will come to the forefront. At that time, for oil prices to increase, OPEC+ will need to convince oil traders that OPEC+ will adhere to its supply targets, as well as extend its latest round of supply cuts past the end of March. Currently, oil traders are not convinced as indicated by the net long positions of oil traders are at low levels.
For a complete forecast of refined products and prices, please refer to our Short-term Outlook.
About the Author: John E. Paise, president of Stratas Advisors, is responsible for managing the research and consulting business worldwide. Prior to joining Stratas Advisors, Paisie was a partner with PFC Energy, a strategic consultancy based in Washington, D.C., where he led a global practice focused on helping clients (including IOCs, NOC, independent oil companies and governments) to understand the future market environment and competitive landscape, set an appropriate strategic direction and implement strategic initiatives. He worked more than eight years with IBM Consulting (formerly PriceWaterhouseCoopers, PwC Consulting) as an associate partner in the strategic change practice focused on the energy sector while residing in Houston, Singapore, Beijing and London.
2023-12-15 - The oil and gas rig count, an early indicator of future output, fell by three to 623 in the week to Dec. 15.
2024-01-05 - The oil and gas rig count, an early indicator of future output, fell by one to 621 in the week to Jan. 5.
2023-12-22 - The oil and gas rig count, an early indicator of future output, fell by three to 620 in the week to Dec. 21, the lowest since mid-November.
2024-01-12 - The oil and gas rig count, an early indicator of future output, fell by two to 619 in the week to Jan. 12, the lowest since November.
2023-12-29 - Baker Hughes said U.S. oil rigs rose two to 500 this week, their highest since Dec. 15, while gas rigs were unchanged at 120.