Oil prices NYSEARCA: USO Oil prices are near the lower end of their multi-year trading range, helping to bolster the overall stock market. Oil prices are a fundamental driver of inflation, which compounds in the economy, and inflation expectations drive the market. Lower oil prices keep inflation in check.
American Oil Fund
(As of June 18, 2024)
- 52 week range
- $60.87
â–¼
$83.41
- Dividend Yield
- 0.00%
- Assets under management
- $1.22 billion
While the latest CPI data did not prompt FOMC action, it is consistent with the idea that a policy shift is underway and that the next policy action will be a rate cut. Falling oil prices support that outlook, but there are risks. In this environment, the economy is under pressure from high interest rates, but is biding its time. Once the first rate cut is implemented, global economic activity will start to improve, which will boost oil demand, drive up oil prices, and drive inflation. This means that the Fed is unlikely to cut rates anytime soon, and the period of high interest rates is becoming longer and longer.
OPEC+ Ends Voluntary Production Cuts, So What?
End of OPEC+ production limits and Increasing supply It was one of the reasons for the recent drop in oil prices, but the details of the decision do not suggest a drop in oil prices. The initial statement was then retracted, instead predicting an increase in oil prices rather than a decrease.
Currently, OPEC+ has cut production by 5.86 million barrels per day, which is about 5.7% of global supply. Of that, 3.66 million barrels per day are official cuts and 2.2 million barrels per day are voluntary cuts. The voluntary cuts are due to end at the end of September, but that is three months later than originally planned, so the cuts will not simply disappear.
OPEC plans to gradually inject 2.2 million barrels into the market over the course of a year, which will have little impact on the supply-demand imbalance. Demand is expected to grow with or without a FOMC rate cut, so it is no coincidence that OPEC will end its production cuts in line with the Fed’s rate cut. Investors should expect OPEC to modify its plans as the interest rate and inflation outlook shifts. Coincidentally, OPEC has now retracted its initial statement, saying it may delay production increases if conditions warrant.
Fed decisions tied to oil demand: a no-win situation
The Fed’s decision to cut interest rates is tied to the price of oil more than anything else. There is a clear correction in the pace of oil price increases and inflation that would prevent the Committee from acting too quickly. Cutting rates too soon would reinvigorate oil demand, creating a bull market for oil and sending inflation to new heights. The key is that the FOMC cannot cut rates for fear of higher oil prices. The only way they can control oil prices is by causing a recession with high interest rates. The Committee is walking a dangerous tightrope between runaway inflation on one side and a recession on the other.
Demand is another factor that is putting the market to sleep. The IEA predicts that demand will slow sharply from 2023, leading to a massive supply glut. This is bearish news. But their prediction is based on expected technological advances related to electrification and renewables that may or may not materialize. A mitigating factor is that demand growth may stagnate, but it will never go away. Oil is needed for more than just cars. Oil supplies are finite (estimated to last less than 50 years at current usage), and there is no way around it other than for prices to rise over time.
Oil prices rise: Buffett increases Occidental Oil stake
So where are oil prices heading now? Oil prices are currently hovering near the bottom, but recent data has led to an uptrend. An improved summer demand outlook, assurances from OPEC to keep supplies tight if necessary, and lower production growth forecasts are supporting the market. WTI prices are moving back towards the top of their range, and inflation is likely to remain elevated.
What should investors do with this information? Berkshire Hathaway NYSE: BRK.A The energy industry is still profitable, even though it is currently shrinking due to debt deleveraging on oil prices beyond 2022. $80 oil prices are trending above the 3-, 5-, and 10-year averages, and profit margins are in the upper end of the range, generating robust cash flows and allowing the oil majors to invest in growth, efficiency, and shareholder value.
Buffett said: Occidental Petroleum NYSE: Oxyhas been improving its leverage ratio and equity capital by paying down debt and buying back preferred stock, with the latest news being that in June, after a series of buybacks, the first in six months, brought its stake to about 30%.
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