Oil prices, inflation and AI, the next head of the Fed, and planning for troughs.
Sometimes when I write these letters to you late on a Thursday night, I put some television on in the background. Having watched every episode of Law & Order: Special Victims Unit at least twice, I have switched over to Paramount+ and have been enjoying the series Landman, starring Billy Bob Thornton, Sam Elliott, Andy Garcia and Demi Moore. It’s about the West Texas oil business and features roughnecks and billionaires fighting to survive and thrive in the tough energy industry.
My favorite character is Tommy Norris, played expertly by Billy Bob Thornton, who emanates fearless grit and experience as the corporate fixer and landman, trying to balance all the competing interests with his own brand of cynical wisdom.
His character recently captured the very essence of this moment in our current world with a quote I have to share: “You want oil to live above 60 but below 90. And don’t get me wrong, we’re still printing money at 90, but… gas gets up over $3.50 a gallon, it starts to pinch. It hits a hundred, every product in America has to readjust its price. $78 a barrel, that’s about perfect. You know, brings enough profit to keep exploring, but it don’t sting as much at the pump.”
Tommy is exactly on point with that sentiment, which is why stock markets were roiled this week by the ongoing price volatility in oil, with WTI crude over $96 per barrel at press time and Brent crude at more than $101 per barrel. To combat higher prices, the U.S. and the International Energy Agency (IEA) pledged to release a record amount of global oil reserves, 172 million barrels and 400 million, respectively.
But even with that promise to flood the market with supply, investors know that it can take roughly 120 days to fully deliver on planned discharge rates, which may be why prices aren’t moving lower yet. In the meantime, Iran remains undeterred. Iran’s new leader, Ayatollah Mojtaba Khamenei, said that the Strait of Hormuz should remain closed and followed up by escalating attacks on ships in the Persian Gulf. A spokesperson for Iran also responded by threatening the world to “get ready for oil to be $200 a barrel.”
So, despite promises of a massive release of reserves, the IEA also warned of “the largest supply disruption in the history of the global oil market,” hitting 7.5% of global output. With flows through the Strait halted and storage facilities filing up, countries in the Persian Gulf have cut total production by at least 10 million barrels per day. And U.S. gasoline prices are now up over 20% in the last 10 days to near $3.60 on average, according to AAA, faster than they rose after Russia’s invasion of Ukraine in 2022.
Inflation reports released this week, all backward-looking, showed benign growth but are being discounted in the current context. For consumers already burdened with years of elevated prices, a meaningful increase in the cost of gasoline will only further compound a loss of momentum, just like Tommy Norris said. On the back of the inflation news, the first revision of fourth-quarter GDP growth came in at just a 0.7% annual pace, half of the prior estimate and significantly lower than expected. Reduced consumer spending on services and health care accounted for much of the slowdown.
Meanwhile, the Federal Reserve will find it difficult to justify any further policy adjustment at this juncture. The already elevated nature of inflation coupled with more recent upside risks stemming from a potentially sustained global energy price shock, means the central bank’s policymakers are in a tough spot, despite the lackluster February employment report.
So, there is not much to make investors feel warm and fuzzy, as there also remains in the souring sentiment worries about AI displacement and disruption as well as private credit fears.
I noted that the administration’s nominee for Federal Reserve chair, Kevin Warsh, described the AI boom as “the most productivity-enhancing wave of our lifetimes—past, present and future,” in a recent New York Times article. He also called AI “structurally disinflationary.” This echoes comments made about the internet when it started to move the economy roughly 30 years ago.
Maybe so, but between this war and AI-data-center-driven demand for energy, power and water, it would seem the Fed is going to have to navigate very carefully to maintain a steady hand on inflation.
Notably, the bond market is not a believer in Warsh’s worldview of an AI-driven disinflationary nirvana, with the 10-year Treasury bond spiking over 4.25% due to war and AI-induced inflation anxiety. Bond market vigilantes have now taken mortgage interest rates well above 6% for a 30-year fixed-rate loan just in time for the important spring selling season.
Another good one from Tommy Norris is this: “The smart ones, they pay cash for everything and then sock away enough to ride out the troughs, but there ain’t that many smart ones.” You, my dear reader, are among the smart ones and we are here to help you review and even re-underwrite your financial plan to ensure that you have the right approach to ride out the troughs today and in the future.
Written by a human.