Commodity prices are in a tail-spin, and global weather is not helping much. A rebound in sugar, cocoa and coffee production, plus a change in the pattern of much improved Midwest weather for corn and beans, has pressured most agricultural commodities. However, it is the energy complex that has really “taken it on the chin” recently. Despite the persistent hope for both an acceleration in domestic, and global, economic growth, commodities are down more than 13% in the past twelve months.
MARCH, 2017—–MY REASONS FOR BEARISH COMMODITIES
How Lower Oil Prices Could Affect the Global Economy and Fed Action
Saudi Arabia earned $134.4 billion last year exporting its crude and refined oil products, down more than 60% from a peak of $337.5 billion in 2012, according to OPEC data. In reaction to plunging oil revenues, the kingdom drew heavily from its petrodollar reserves which have dropped below $500 billion for the first time in five years. Nevertheless, Saudi Arabia can still make decent profits even with oil at $30 a barrel. Consequently, there is little incentive for them to curb production. In addition, they began opening refinery operations a year ago, thus becoming an exporter of fuels and other petroleum products. This gives them a completely new revenue stream.
Combine this reality and the fact that the arctic is being tapped for more oil reserves, U.S. shale is increasing and the Chinese are taking measures to rely more heavily on renewable energy and cut their pollution problems, and one has very little case that crude oil will climb back over $50-$60, anytime soon.
The oil industry is learning to live with lower prices as the cost of exploration and production has come down. It is quite possible that this condition will ever change again.
With oil, natural gas and renewable energy sources so cheap, energy-fueled inflation may well be a thing of the past.
The cost of renewable energy sources, such as solar and wind, are slowly coming down, making them more competitive in the world market than ever before. If this trend continues, despite the Trump administration’s ill conceived action of pulling out of the Paris Climate Agreement and trying to revamp the U.S. coal industry (forget it—won’t happen in my opinion), global oil demand could stay flat or even fall over the years to come.
The Fed successfully fought financial deflation in the wake of the credit crisis in 2008/09. But technological deflation is making a comeback, which might limit price increases in consumer goods and services for many years to come.
There is some risk of financial deflation perking up again. While usually, there is often an inverse relationship with the price of equities and commodities, commodity price deflation might force resource companies to cut back again. Hence, while the U.S. stock market continues to roll along, this all “might” be a warning flag of “caution” in the months ahead.
Certain equity sectors could be at risk and in those emerging markets (Mexico, Brazil) that depend heavily on higher oil prices to boost their economy.
Perhaps, this might all influence Janet Yellen to rethink the Fed’s plan to raise interest rates in the months ahead. Inflation may not be headed in the direction that they feel.–Jim
