To The Moon

The weekend is upon us.

It is time to kick off the shoes and relax a bit, even for a fleeting moment.

Still doing my readings on varied topics / subjects to keep engaged.

Also, letting my imaginations run amok as I hypothesize about the “what-ifs”.

In another Multi-verse, it might just be the “truth”.

What am I getting up to?

• US July Consumer Price Index (CPI) was released on Thu, 10 Jul 2023.

• It came in at 3.2%; 1% off the mark from wall street 3.3% forecast.

• Comparatively speaking, its +0.2% higher than June 3.0% CPI though.

Backdrop Against The 3.2% July CPI:

• The Kingdom and Russia have “volunteered” to reduce output capacity by 1 Million barrels per day since July 2023.

• This has “effectively” drove up oil prices.

• On 03 Aug 2023, Saudi Arabia announced that the additional 1 Million b/d cutback to be extended until end September 2023.

• It is anybody’s guess that both countries may continue to maintain “additional” production cut beyond revised timeline, to pressure oil price to rise to $90 per barrel & beyond.

US Oil Reserves - Past 5 years

• On 23 Nov 2021, President Biden ordered a release of oil from US’s Strategic Petroleum Reserve (SPR).

• This arose in a bid to tamp down rising fuel prices and to address the mismatch between demand and supply, while exiting the Covid pandemic.

• When the Russia-Ukraine war broke out on 24 Feb 2022, US continued to draw from SPR to compensate for supplies shortfall as a result Western oil sanctions on Russia.

• Into 2023, the Biden administration is still tapping the national reserves and reaches a historic low (in supply).

Is this why despite OPEC “massive” output reduction, oil prices did not rise above $90 & beyond, as forecasted?

• No one knows when SPR draw down will stop.

• No one knows when backfill will commence to replenish the “siphoned” 264.79 Million barrels {and counting}?

• With less than 347.75 million barrels of oil left in SPR, how long will this be able to sustain US domestic oil consumption?

What happens when SPR is depleted?

Potential harms should the unthinkable occurs:

• Sharp increase in oil prices due to bias interactions between demand and short supply.

• Higher risk of (a) inflation resurgence and (b) unemployment.

• Monthly decline in (a) economic growth and (b) competitiveness in global market.

• Greater vulnerability to geopolitical conflicts and oil embargoes.

US Federal Reserves - Roles & Responsibilities:

• Setting interest rates.

• Managing US money supply.

• Regulating financial markets.

Strictly speaking, it is not the Fed’s purview to ensure the scare energy resource (Oil) is efficiently managed.

However, if the Fed does not seek the Biden administration to resolve the “SPR-Domestic oil demand impasse” (see above), the spillover effect might be inflation re-emergence.

With an existing interest rate (5.25% to 5.5%) that is one of the highest in recent US history, there is little to no leverage for the Fed to raise another interest quantum (of additional 5%) without dire repercussions.

• At the time when author Adam Button (see above) news article was published, crude oil has risen to $83.69, that is up +$0.80,

• More importantly, price is above April 2023’s high of $83.53 (see above).

• Price driver appears to be products.

• Both (a) gasoline and (b) diesel inventories are in tight supply because of Russian sanctions.

• US gasoline futures rose +2.4%.

• The highs (attained) would be at the highest level since last October.

Likelihood of oil prices rising further (in coming week) is a potential.

Does this imply that August CPI might even be higher than July CPI of 3.2%? Possibly?

This is how I see it:

• The Fed is “locked” in a “damned if you do and damned if you don't" position.

• If it ignores the acute SPR shortage, the repercussions might be even harder to contain when the time comes. [case 01]

• Conversely, If the Fed proceeds to raise another 0.25% at the next FOMC meeting, would this cause US to slip into recession? [case 02]

• Given the above “two-evils”, embarking on case 02 is a more prudent approach; given that current state of the US economy is on the mend; albeit a slower pace.

• If CPI were to inch up from Aug onwards, the Fed might be left with “no choice” but to (i) continue to raise interest rate and (ii) it might be more than once.

To me, It “looks” like there is a power struggle between the US and OPEC (in the background) on who will decide where oil price is supposed to be.

• Do you think the Fed will raise interest rate during September FOMC?

• Do you think the Biden government should (a) stop drawing from SPR and (b) replenish all consumed oil while oil price is still “manageable” ?

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