Is it little wonder why the multitudes involved in financial markets, and indeed, all the civilian sectors they ultimately represent have become even more addicted to doom scrolling since one Donald J. Trump resumed power at 1600 Pennsylvania Avenue? Take your news as you see fit, right-wing, left-wing or pan-wing, his acts and words of governing bring unanimity in incredulous jaw-dropping. Having floated the idea of ousting Federal Reserve Chair, Jerome Powell, on Tuesday evening to his party’s lawyers, it did not take long for such deliberations to hit the wires during Wednesday’s trading hours. It is hard not to believe such a sensitive issue that ought to have a double ‘top secret’ stamp on it, was not released in another undermining attempt. This was evidenced when while the President rebuffed that he had made any such decision, he qualified it by saying, and in a combined paraphrase, “It would disrupt the market if I did, […] I would love for him to resign”, and an earlier low hanging insult of, “unless he has to leave for fraud.” Jerome Powell has rightly not joined this Kabuki-style dramatic performance, we await his memoirs. But if there existed a confidence marker in how the US economy is managed, it very much turned lower. Treasuries, bonds, equities and the US Dollar see-sawed to eventually showing no signs of what is a real threat to the independence of the Central Bank, but such are the frequency and pull-backs of this Administration’s whims and fancies, that markets have become worryingly immune.

As for our market, it adhered to a brief move in sympathy returning quickly to matters of inventory with the EIA Inventory Report showing a 3.9mb draw in Crude levels. With the narrative of dwindling stocks, any other bullish driver could not fail to be seized upon. The Middle East rarely disappoints when required to offer a hand in moving oil prices higher and came in two guises. Israel carried out airstrikes into Syria, and while not particularly oil-newsworthy it is a reminder on how the area is never far away from confrontation. Secondly, drone attacks on oil infrastructure in Kurdistan has cut output from the oilfields by 150kbpd. According to Reuters, Iraqi Kurdistan security sources said initial investigations suggested the drone came from areas under the control of Iran-backed militias. However, there is growing opinion that the attacks are driven by those opposed to Kurdistan’s autonomy and how closer agreement is worked toward a fairer split in oil revenues with Iraq’s government. With many of the operators in the region pulling out, and if the shortfall in production becomes prolonged, it will add another string to bullish arguments.

Inflation inspires oil length

As much as the current US Administration wishes the era of tariffs to be price neutral, the CPI report on Tuesday gave an insight into how the future might play out with prices paid by ordinary Americans creeping higher. The core price accelerated by 2.9% and analysts are beginning to gather around forecasting it to wander higher and settle around 3% by the year’s end. The other major economies of the North Atlantic report much the same in the passage of prices. Eurozone inflation in June ticked up from 1.9 to 2%, although core inflation remained at 2.3%, and yesterday saw the UK’s core score come in at 3.7%, two-pips higher than both the May reading and expectation.

Much of oil positioning is undertaken with supply and demand in mind, followed obviously by the many geopolitical incidents that beset this world in alarming and increasing regularity. But what is sometimes overlooked is how oil futures are very much a favoured destination for institutional investors and their ilk when hedging against inflation. It is rather a curio on how rallying and inflationary commodities fuel buying interest from those that seek protection from higher prices, made even more interesting when agricultural, soft, metal and oil goods experience demand in times of growing economies. Therefore, a double-whammy of reasons to be inflationary-long can exacerbate rallies, which is unfolding particularly in our market. It is disingenuous to regard oil as having increased demand, but with not enough of the right crude grades in the right places and a low stock situation in motor fuels, the effect is much the same.

Last year in an excellent insight, Goldman Sachs Research observed that a “one percentage point surprise increase in US inflation has, on average, led to a real (inflation adjusted) return gain of 7 percentage points for commodities.” The ‘surprise’ inflation research was based around the 1970’s oil embargo and Iranian Revolution, China’s boom from the early part of this century and the recovery witnessed after the Covid shutdowns. Now, there is no surprise on inflation at present, it is a creeping affair and therefore the effect on oil should be toned down accordingly, yet the point remains valid.

One of the reasons inflation length goes unnoticed in oil circles is how the commitment of traders (COT) does not differentiate between various types of speculative positions. Lumped into a single category, one might reasonably be lured into concluding a positive or negative attitude from ‘funds’, so the creeping influence of inflation might have a creeping influence on oil prices without much of a fanfare. As noted on Reuters, energy forms 6.4% of the US CPI and 9.9% of the Euro zone equivalent, according to the U.S. Bureau of Labour Statistics and Eurostat respectively. Yesterday’s jump in the UK’s reading was much attributed to higher fuel costs.

Inflation to oil is clearly not a straightforward study, they loop around each other disguised under the miasma of the current geopolitical ruckus. However, it cannot be argued that current data would have that inflation as rather sticky at present. Given the warnings by so many of how global trading, when confronted with tariffs, will carry on registering increased pricing for legions of goods, inflation looks set to be a long-term concern. This behaviour favours the slower paced positioning of inflation hedging and unlike the fast programming of CTA’s and high frequency trading (HFT), the long side positions held will be obstinate, and likely to be added to. 
 

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