Get Ready for $150-200 Oil and Higher Inflation
Peshkov/iStock via Getty Images
Trafigura’s CEO recently warned of parabolic oil prices due to market imbalances. Goldman Sachs also saw oil prices reach $140. I recently told my market clients that oil was moving above $114 and now we are trading at $120. I think oil will test its all-time high of $148 and there is clear spot above there for a real parabolic move.
Trafigura and Goldman Sachs see oil at $140 or more
Trafigura Group CEO Jeremy Weir recently warned that oil prices could be “parabolic” in the future.
Veer said, “We have a serious situation. I really think we have a problem for the next six months. … Once it gets to these parabolic states, the markets can move on and they Can grow a lot.”
“If we see very high energy prices for some time, we will eventually see a destruction in demand,” he said. “Maintaining these levels and continuing global growth will be problematic.”
JPMorgan (JPM) CEO Jamie Dimon joined the chorus of doom last week with warnings of an economic “storm.”
Dimon said that in the market, we have “unexpected consequences, and this happens within the world’s commodity markets, wheat, oil, gas and goods, which in my view will continue. We are not taking Europe into oil in the short term.” Appropriate action to prevent this from happening, and we are not taking appropriate action to protect all of you. … The price is almost bound to increase.”
Goldman Sachs also said in a recent investment report that they see Brent crude oil prices at $140.
“A big price hike is possible this summer,” said Goldman Sachs strategists.
I really believe we will see higher prices as crude was at an all-time high of $148 in 2007. If prices reach $140, which looks possible on the current technical analysis, they will almost certainly test the $148 level and the price has the potential to make its parabolic squeeze above that level.
WTI Oil (W) (Trading View)
Oil was rejected at the highs of $120 but soon broke below $114 and I told clients to be prepared for the next move. When a market fails to correct from that type of rejection it shows clear buy support.
Trafigura’s Jeremy Weir is right. We are facing a dire situation in the coming months and I expect oil to reach the previous high this year. The technical specs above suggest that $200 is an easy target and this resistance is likely to rise slightly higher until 2023.
Oil Futures Positioning (City Index)
The oil futures position also shows that shorts are being trimmed, so there may be a slight resistance on the upside of the path.
Central bank estimates are more rosy
The European Central Bank this week outlined its rate hike path to tackle rising inflation and the bank’s projections are once again out of touch with reality.
Inflation in the eurozone is projected to be 6.8% this year, with the rate forecast to fall to 3.5% before March and, miraculously, falling to 2.1% by 2023. This is easily 0.1% higher than the bank’s target rate and the numbers seem like an attempt to downplay the level of criticism being leveled at policymakers. The ECB also expects to achieve that end result with a 0.25% interest rate hike in July, followed by a possible 0.25% or 0.5% increase in September. Banks are far behind the curve compared to other banks and recently we have seen spreads against German bonds for the troubled states of Greece and Italy.
Painfully, the ECB also recognizes that energy prices are the major driver for inflation, so their estimates are clearly based on a return to the historical average in oil.
“Energy inflation is projected to decline significantly by the end of 2022, due to negative base effects and assumptions of a downward sloping oil price futures curve,” the ECB said in its most recent June macroeconomic projections.
Inflation in the US can reach 15%; ECB wrong again
Otmar Ising, the former chief economist at the ECB, said in a recent article that central banks were still “waiting for Godot” and that their forecast for temporary inflation was “perhaps one of the biggest forecast errors since the 1970s.” One” was created. and a step below 2%.
The central bank still thinks the current problems are somewhat fleeting and Ising said:
“The pandemic, in conjunction with supply and demand shocks, continues to negatively impact production capacity and is a major source of structural problems,” and that, “traditional models are unable to take into account substantial structural changes. “
So the central banks are mistaking it on inflation and it will suffer in the coming year. Using your best and worst case scenario, The European Central Bank sees a worst-case scenario of around $170 in 2023 and $165 in 2024.
Oil and Gas Price Forecast (ECB)
The European Central Bank posted a beautiful chart in its recent projections that highlights inflation falling off a cliff from their current parabolic rise.
ECB Inflation Projection (ECB)
In the United States, the latest inflation forecast hit 8.6% for the highest level in 40 years.
US Inflation (Bloomberg)
If we go back further to the end of 1979 on a technical basis we can see resistance around the $10 level, but with the current unfavorable conditions inflation could go up to 15%.
US Inflation Rate (Business Economics)
The Federal Reserve is expected to hike 50 bps in its next meetings to deal with the situation as food prices and wage hikes begin to worsen the problem.
Moody’s Analytics economist Mark Zandi drew a line in the sand for the US economy on $150 oil, saying:
“If oil prices go up to $150, we’re going into a recession. There’s no way out.”
US inventory exposes supply crunch
The latest US inventory data shows crude oil and gasoline levels declined. Cushing inventories declined by 1.59 million barrels last week, according to the EIA. Gasoline demand is also increasing despite US prices reaching a record high of $5 a gallon. The EU ban on refined petroleum products from Russia is causing a shortage in diesel supplies.
Markets have also been shaken by a proposed EU ban on refined products outside Russia and could be a driver for a parabolic move in energy prices.
According to the EIA, “the possibility that these sanctions or other possible future sanctions reduce Russia’s oil production by more than expected, poses an upward risk to crude oil prices during the forecast period.”
Russia currently supplies 7 million barrels of oil per day against a global demand of about 100 million barrels per day. Therefore, 7-10% of daily consumption will need to find a new vendor and this will worsen the existing pressure.
Last week saw OPEC raise its production levels but countries are struggling to meet their targets. OPEC said it would increase production by 648,000 barrels per day in July and August. The group says it can’t supply anything else after taking Russian production out of the equation.
conclusion
Markets expected May to signal a peak in inflation but were wrong. All signs now point to higher inflation in the United States with a potential 15% at the end of the year if oil turns higher in 2023. Central bank projections for the EU see a worst-case scenario of $170 in 2023 and $165 in 2024, but Trafigura’s CEO has warned of the risk of more of a parabolic spike. As OPEC fails to add production, and US supplies are tight, Europe could drop a sledgehammer on the market with a ban on Russian oil imports and could be the driver for oil to reach its previous high of $148. As bears are turning lower, there is likely to be a slight resistance to test the $150 resistance and a move above that level will bring parabolic risk.
