Tags: oil | inflation | dollar | futures

Oil Futures Show Inflation Worries Unfounded as Prices Signal Drop

Tuesday, 14 October 2014 01:57 PM

For signs of just how much inflation concerns have been erased by the global economic slowdown, look no further than oil.

West Texas Intermediate crude, the U.S. benchmark, has plunged 22 percent since June 20 to $83.65 a barrel, the lowest in more than two years. A year ago, WTI crude for delivery this month traded at $95.91 a barrel, a level that implied a 6.3 percent decline over the next 12 months. Prices ended up falling even more as demand slowed across Europe and Asia and the dollar rallied, touching a two-year high against the euro.

The speculation that unprecedented central-bank stimulus would push up inflation has proven unfounded. In Europe, policy makers are now trying to stave off deflation while demand for inflation protection in the U.S. bond market is drying up and growth in China is slowing. Oil futures traders were ahead of this, anticipating falling prices as expanding U.S. supply sparked competition with OPEC just as demand weakened.

“The oil market seems to be a better economic indicator than anything else,” Phil Flynn, an analyst at Price Futures Group Inc. in Chicago, said. “We probably wouldn’t have the stronger dollar if we didn’t have rising U.S. oil production, and we wouldn’t have the price of oil fall as far if we didn’t have a stronger dollar.”

WTI futures sank 0.1 percent on Oct. 13 to $85.74 on the New York Mercantile Exchange, the lowest settlement since December 2012. Gasoline futures fell to $2.2553 a gallon on the Nymex, close to a four-year low. Pump prices for regular unleaded averaged nationwide were at $3.186 a gallon, the lowest in 11 months, according to Heathrow, Florida-based AAA.

Stronger Dollar

The dollar has risen 4.6 percent this year against 10 peers, making raw materials priced in the greenback more expensive for buyers outside the U.S. and deepening the selloff in crude.

World oil consumption will expand at the slowest pace since 2009 this year as economic growth slows in Europe and Asia, according to the International Energy Agency. The Paris-based adviser to industrialized countries cut its demand forecast yesterday for the fourth time in a row, to half what it predicted in June.

As demand slumps, output is increasing.

The U.S. is adding an unprecedented 1.1 million barrels a day this year, the Energy Department estimates. The Organization of Petroleum Exporting Countries boosted September output to a one-year high of 30.935 million barrels a day.

‘Feedback Loop’

“There’s a feedback loop,” Wittner said. Oil reflects a stronger dollar and also contributes to lower inflation because fuel is a major component of consumer spending, he said.

Many economists, including John Taylor, professor of economics at Stanford University, and Douglas Holtz-Eakin, a former director of the Congressional Budget Office, have been warning that the Federal Reserve’s stimulus, almost $4 trillion of bond purchases since 2008, would spark an inflation surge.

Instead, prices as measured by the Fed’s preferred gauge, the personal consumption expenditures price index, rose just 1.5 percent in the 12 months through August. The rate has remained below the Fed’s 2 percent target for more than two years, causing concern among policy makers that inflation will remain too low or prices will even start to fall, which can create a vicious circle of lower spending and declining wages.

Central Bankers

Central bankers including regional Fed Presidents William Dudley of New York, Charles Evans of Chicago and Narayana Kocherlakota of Minneapolis recently cited below-target inflation as a risk that weighs against raising interest rates too soon. Weaker-than-anticipated foreign growth could lead the Fed to slow down removing support for the economy, Fed Vice Chairman Stanley Fischer said in an Oct. 11 speech at the International Monetary Fund’s annual meetings in Washington.

Minutes of the Fed’s September gathering released Oct. 8 showed officials highlighted concern that deteriorating growth abroad and a stronger dollar may hurt the domestic economy by curbing exports and damping inflation.

The outlook in Europe and Asia is more dire. The European Central Bank plans to stimulate growth by buying asset-backed debt, while economists have cut estimates for Chinese growth after disappointing data on industrial profits, factory output and credit. The IMF last week cut its forecasts for global growth in 2015 to 3.8 percent from 4 percent.

Bond Investors

Bond investors, who have put five-year Treasuries on track for the biggest monthly rally in three years, are betting that U.S. inflation will remain below the Fed’s 2 percent target through 2019. Their expectations for average annual inflation, as measured by the gap between fixed-rate securities and those linked to consumer prices, have plunged to about 1.5 percent from 2.1 percent in June.

As demand for oil has waned, so has the appeal of the inflation-linked notes, known as TIPS. Investors have withdrawn $871 million from exchange-traded funds that invest in securities designed to protect against inflation, or 4 percent of the holdings of those funds, since Sept. 1, data compiled by Bloomberg show. The $12.4 billion iShares TIPS ETF run by BlackRock Inc., has had $835 million in outflows since Sept. 1, following four consecutive months of inflows, data compiled by Bloomberg show.

Mitchell Stapley, chief investment officer for Cincinnati-based ClearArc Capital, which manages $7 billion, said he noticed on his way to work recently that gasoline prices had fallen to as low as $2.99 a gallon at one station.

“The following thought as a portfolio manager is not, ‘Gee, I need to buy some TIPS to protect against a wave of inflation about to wash over us,’” Stapley said.

© Copyright 2018 Bloomberg News. All rights reserved.

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For signs of just how much inflation concerns have been erased by the global economic slowdown, look no further than oil. West Texas Intermediate crude, the U.S. benchmark, has plunged 22 percent since June 20 to $83.65 a barrel, the lowest in more than two years.
oil, inflation, dollar, futures
Tuesday, 14 October 2014 01:57 PM
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