Wednesday, December 17, 2014

For Whom the Oil Tolls

We haven’t been shy about pounding the drum on oil prices.  We thought last summer that the slump at the pump would supercharge the holiday shopping season with a huge “tax cut” for consumers long-suffering from stagnant paychecks.  We still think it will do that, enabling retailers to meet their sales and earnings targets.

However, the slide has turned into a crash, with sweet crude well below $60 on the near-month futures contract.  What’s more, the 10-year Treasury yield is flirting with 2%, currently at its lowest level of the year. But employment gains continue apace, and last month wages finally showed some life.  Oh, and the inflation landlord?  We can look that guy right in the eye.

At the risk of getting all Panglossian, it’s a return to the “goldilocks” economy of the Clinton years isn’t it?  Our old friend ROW (rest of the world) has another view.  The oil price has been widely seen in the U.S. as a supply phenomenon.  Shale technology and all that frack.  But elsewhere it’s a demand thingamajig. Europe remains sclerotic, China is slowing and Japan has slipped into recession.  The United States has become the little engine that could – so far.

This state of affairs is obviously salubrious for you and us and all the John Qs with tanks to fill or airplanes to fly.  Even the local motorcycle gang might be able to afford another meth lab.  But is it predictive of bad times to come or contemporaneous with them? 

Surely it’s the latter.  What seller in any market – be it oil or life-saving miracle drugs – wouldn’t gouge the heck out of us if we (or insurance companies) had the coin to cough up.   There’s a limit of course.  Folks would cut back if energy became too dear.  But the oil market is no stranger to pushing the envelope just short of demand destruction.  Apparently, demand can destroy itself just fine, thank you.

WTI Crude Futures Contract

The upshot?  The Federal Reserve Open Market Committee will be reluctant to commit to raising the Federal Funds rate target as early as most expect.  We’ll hear from policy makers today.

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