Crude oil has been on a tear, with WTIC approaching $88 a barrel and Brent topping $90. Normally this would be a symptom of inflation, that is dollar depreciation, but at least in the short term, this is not the case. This surge in oil prices is real.
We’re not seeing a broad rise in other real time dollar denominated prices, which would indicate a decline in the dollar itself. To the contrary, US stocks are down, XS stocks are down, copper, gold, silver & platinum are all lower. Such across the board declines indicate a move higher in the dollar. This is also reflected in the forex markets, where the dollar index has risen as well.
So it really is about the oil. It’s rising against a rising currency. What are the implications?
It’s chancy to read a lot into it given the youthful age of the trend. Production cuts in oil producing countries are meeting strong consumption. Such trends can appear and disappear without having much lasting impact. We make this observation despite our long term bullish disposition on energy prices. But a similar case can be made for other hard commodities like copper, given its potential demand for “clean” energy.
And any renewed dollar weakness – another long term likelihood – would only add to nominal price increases. So either this oil rally abates or other prices recover to play catch up. Timing is always the biggest challenge, but given the interest rate cycle, deflationary tailwinds could appear before the sustained bullish undercurrents reassert their dominance.