28 Sep OIL AND TREASURY YIELDS AGAIN HIGHER
WTI is over $75/barrel. Goldman is suggesting this benchmark can reach $90 by year end on a “supply crunch” and strong demand. What is “different” about this surge is the shortfall in exploration and supplies is primarily the result of legislative fiat via western governments.
Several western governments have banned the use of fossil fuels in the not so different future. Government regulation has made it probability expensive for most oil companies to borrow. Banks are required to estimate climate costs on all loans. Oil exploration is extremely capital intensive.
An issue at hand is the unreliability and accessibility of alternative energy sources. The technology is not there yet. A question at hand is when or will there be the proverbial breakthrough moment?
I would like to digress. The Jetson’s carton series ran from 1962-63 and it was about what life/transportation might be like in 50-60 years. The creators extrapolated the massive increases in air travel assuming that past change was indicative of future gains.
All have to remember that in 1939 most air forces were comprised of biplanes. Six years later there was the advent of jets. Little has really changed in air travel since the early 1950s other than it is safer and more comfortable. The basics have not changed.
It is human nature to extrapolate the past into the future for most can only relate to the immediate as it is the here and now.
Will reliable and inexpensive alternative fuel sources become a reality?
Some believe the US is setting itself up for a European like energy crisis. European natural gas prices have surged almost 500% in the past year trading near a record, primarily the result of legislative action that forced utilities to abandon coal and nuclear. The issue at hand is twofold. First there is not enough natural gas too meet demand and second is the unreliability and access to green energy.
Currently in Europe, renewables are failing miserably as the sun is not shinning and the wind is not blowing. Redundancy is absent. Capacity is not available.
What does this have to do with the US? As noted last week, the gap between core CPI (ex food and energy) and the 10-year Treasury has only been this great twice in history. Both were brief and occurred during energy crises.
Today the gap between the core CPI and the 10-year Treasury emerged as energy prices fell about 12% to 14% during August. Since August’s plunge in crude, prices have since rallied to the highest levels since October 2018, gaining about 24% in about 4 weeks.
How will this impact the inflation data? As noted above, a major reason for Goldman’s bullish call on crude is lack of supplies and strong demand. Will power prices surge in the US as is the case in Europe?
There are several indices suggesting the power/heating bills will increase 25%-30% in 2022, the result of utilities ensuring supplies for their customers.
As noted many times, Treasuries have been crushed in recent trading sessions. Some believe, myself included, the 10-year Treasury will yield over 2.0% by year’s end.
Is this target to low given surging energy prices, prices that at this juncture may advance even more?
Yesterday equity performance was bifurcated. The Dow advanced about 0.25%, the NASDAQ fell about 0.50% as oil advanced another 2% and the yield on the 10-year Treasury rose to 1.52%, the highest level since early June.
Last night the foreign markets were down. London was down 0.35%, Paris down 1.61% and Frankfurt down 1.20%. China was up 0.54%, Japan down 0.19% and Hang Seng up 0.25%.
The Dow should open nominally lower on surging Treasury yields and oil. NASDAQ futures are off almost 2.0% for the same reason. The 10-year is off 17/32 to yield 1.55%. Oil is up another 2%, with Brent topping $80 for the first time in over 3 years on surging demand and “extremely tight supplies.”