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Energy is Chirping

CAMS Weekly View from the Corner - Week ending 3/1/24

March 4, 2024

A non-topic for a year-plus now, if not nearly two years for both the consumer in you and the investor in you has been energy.  Energy becoming a non-factor in recent time has certainly helped the overall price inflation numbers.  Energy plays a notable role in the economic structure to the point of impacting prices in many areas that are seemingly unrelated. 


The direct impact on headline price inflation measures can be appreciated by extracting energy costs from the Consumer Price Index (as an example) with a resulting “core” measure as the process is often referred to.  To be accurate this extraction process includes food along with energy to give a resulting core price inflation measure. 


This process takes out the obvious energy (and food) impact but does not account for the more embedded price inflation that energy creates when its price is rising. 


A rising energy cost backdrop filters through to many seemingly unrelated goods and services.  This is obvious and yet is easily set aside.  Energy prices trending consistently higher can play a role in elevating prices in many goods and services.


Energy Prices are Chirping

To get some perspective the above depicts the price trends of oil over the previous 3 years.  Our two red arrows highlight the notable uptrend and then downtrend in prices in 2021 through 2022. 


Our red circles denote the bottoming price action in oil – the stuff just didn’t want to put in a lower low - i.e. the downtrend ended. 


The first circle covers a few months in early-to-mid 2023.  It attempted to continue trending down but failed to do so.  Our second circle (far right) notes how prices attempted to challenge the previous lows (the circle to its left) but comparatively only very briefly. 


The brevity of the far right circle compared to the left circle notes how little interest market participants had in any serious attempt at challenging those price lows or to even attempt at putting in a lower low price point.  That is very important market pricing information.


To the point that energy prices are chirping - in just over a couple of months (bottom of the far right red circle to the current price point) the benchmark oil price has increased 18%.  The building uptrend attempt at the far right of the above chart doesn’t look like much but a double digit percentage growth rate in a short time is notable.


A Much Broader Perspective

Above is the same oil view as our first chart except this one is expanded out to cover the previous decade for a much broader perspective.


Our red horizontal line notes the $70 level as an interesting line in the sand over the decade.  In looking at the chart in totality it begs the question is $70 oil the new, “oil is cheap” price point.  It used to be a ceiling but now is becoming a floor. 


Through a 20 year view we have seen this unfold before but unlike then we are in an overall price inflation societal storyline that is fervently searching for an end – said storyline cannot afford $70 oil to be the new bottom. 


Recollect our two red circles in our first chart which depicted recent low points that ended the attempts at further downtrends.  Those points can be seen in the above chart as well via our red horizontal line i.e. the $70 a barrel marker.  To be clear we cannot offer with certainty that $70 is the new permanent floor.


What is certain is there will be an impact on price inflation if this is the case and this is seemingly not appreciated to the extent it should be.  In light of energy’s impact throughout the economic structure its price trends embed downstream in many goods and services which do ultimately show up in the price inflation storyline.


And Then There is Gasoline

For a more concentrated view relative to our two previous broader views we offer the above one year chart for gasoline. 


On the surface what looks like a wealth of drawings and markers can be succinctly boiled down to gasoline is rising fast and is threatening to take out the previous high price range.


Digging in just a bit the far left box denotes the price range that lasted for a few months starting a year ago.  After a couple of very brief jumps price settled down into a much lower and consistent price range (right box) that was in place over the previous several months. 


That began to change in mid-December when price attempted to move to a lower low but immediately rose upward and has not looked back since. 


Via our black circle we are now back to the high point of our previous range (first red box) and are clearly threatening to push onward from here.  This growth in gasoline price has been much larger than oil with gasoline rising 31% since mid-December. 


With gasoline being a distillate of oil we can expect them to trend in the same general direction so the above simultaneous trends are not surprising.  If these trends continue as near-term months unfold they will begin to unwelcomingly show themselves in price inflation measures.


Connecting the Dots


Upward trending energy prices impacting general price inflation measures can add another large categorical concern alongside the broad category of Services pricing which remains anything but under control.  This offers a brewing recipe for the general price inflation storyline to offer some potential downstream surprises. 


This would then connect to an expected concern from the bond market and how those participants could be seen to send yields (think interest rates) higher in light of unexpected price inflation behavior. 


All of this then could certainly be expected to catch the eye if not ire of stock market participants as the extreme valuation levels said participants have bid shares up to are built on the expectation of notably down trending interest rates. 


This is a brief flow of connecting the econ/market dots that offers a potential downstream storyline.  The more succinct version is - keep an eye on energy prices.


This is not a prediction but we will not be surprised at all if oil continues to carve out a consistent uptrend that other markets begin to take note in light of how energy prices filter through the economic structure and through this the price inflation numbers and through this the inter-play of various markets.


It could get interesting if energy prices continue to develop to the upside.  As always, time and close observation will fill in the holes. 


For now we are watching all these interactions closely with no certainty of outcome which is why we are merely noting that energy is chirping and with these chirps it is time to pay close attention to its developing message.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

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