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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Higher Oil Prices Not Likely To Lead To Runaway Inflation

  • Oil prices are still trading near seven-year highs, and the Biden administration is feeling pressure to lower inflation
  • Cathie Wood of ARK Invest is predicting that advances in technology will push productivity higher, helping to bring inflation in check
  • While climbing oil prices and inflation were once closely related, the correlation between the two has been steadily falling since the 80s.
Oil prices

After a relentless rally,  oil prices have lately tumbled, falling for two days on potential de-escalation of the Ukraine crisis and the resumption of Iran nuclear talks. March WTI crude (CL1:COM) slipped -2.1% on Tuesday to $89.41/bbl, with April Brent (CO1:COM) falling by a similar margin to trade at $90.75/bbl.

French President Macron has said he has received assurances from Vladimir Putin that there would be no "escalation" of Russian pressure on Ukraine, while diplomats from Iran and world powers have reconvened in Vienna to seek a deal reviving the 2015 nuclear accord.

But while geopolitical optimism has prompted some profit-taking, OANDA analyst Edward Moya says the price weakness likely will be short-lived as the oil market remains in a supply deficit.

Oil prices are still trading near seven-year highs, and the Biden administration is feeling pressure to lower inflation--the fastest way to do that would be to lower energy prices, as Mizuho's Robert Yawger has told MarketWatch.

But another Wall Street expert is now saying that whereas high oil prices are likely to weigh on the economy, another potent force will keep inflation in check.

Maverick stock picker Cathie Wood of ARK Invest (NYSEARCA:ARKK) has told a webinar that advances in technology will likely push productivity rates higher, outweighing any gains in wages.

"We have a very strong point of view that productivity gains we will witness over the next five to 10 years will be astonishing. We think productivity will increase 5%-plus, and we won't have an inflation problem," she said.

Wood remains one of the few prominent fund managers who say that deflation, rather than inflation, will be a driving force in the U.S. economy and stock market over the next few years. ARK Invest has become famous for being something of a contrarian by betting on high-valuation, high-growth stocks that soared during the early stages of the pandemic. Indeed, the ARKK portfolio appears vulnerable to further declines in tech valuations due to its overweighting of high-multiple stocks.

ARKK's top five holdings are: Tesla Inc. (NASDAQ:TSLA), Teladoc Health Inc. (NYSE:TDOC), Zoom Video Communications Inc. (NASDAQ:ZM), Roku Inc. (NASDAQ:ROKU), and Coinbase Global Inc. (NASDAQ:COIN).

ARKK is down 23.5% YTD and has declined 52.8% over the past 52 weeks.

High inflation bullish for oil?

Spurred by a massive inventory rebuild and consumers flush with cash, the U.S. economy last year expanded at a blistering 6.9%, its fastest pace since 1984.

But analysts are warning that the rosy times are over.

A persistent pandemic, ebbing tailwind of fiscal stimulus, and a Federal Reserve that has pivoted from the easiest policy in its history to hawkish inflation-fighters will make growth much harder to come by in 2022 and beyond.

"Growth is likely to slow abruptly in 2022, as fiscal support fades and, in the near term, virus spread weighs on services spending and prolongs supply chain disruptions. Q1 growth is likely to be particularly soft because the fiscal drag will be accompanied by a hit from Omicron," Goldman economist Ronnie Walker has said in a note for clients.

GS has cut its full-year GDP growth outlook to 3.2%, well below the current 3.8% consensus.

Meanwhile, surging energy prices are being roundly blamed for the runaway inflation.

With the U.S. Labor Department set to release January's consumer price index figures on Thursday, inflation data is expected to show that prices rose 0.4% in January, for a 7.2% gain from one year ago, which would be the highest in almost 40 years. The reading follows a stronger-than-expected January jobs report, which has led to speculation that the Federal Reserve could be more aggressive when it comes to hiking rates. 

Thankfully, the oil-inflation nexus has weakened considerably since the 1980s.

For instance, during the 1990s and the Gulf War oil crisis, inflation remained stable despite crude oil prices doubling in six months to around $30 from $14. This decoupling between the two metrics became even more apparent during the 1999 to 2005 oil price rally when the annual average nominal price of oil rose to $50 from $16.50 while CPI rose by a much smaller margin to 196.80 in Dec. 2005 from 164.30 in Jan. 1999.

The price correlation between crude and gasoline has changed quite a lot over the years--and in ways that do not favor the consumer. Most states have raised gas taxes, refiners face new rules that add cost, and there's a shortage of drivers for the trucks that deliver gas to filling stations.

The relationship between high oil prices and high inflation is, therefore, not quite as simple or straightforward as was the case in the past.

Indeed, some experts have even made a somewhat roundabout argument that high inflation and a weakening dollar will push oil prices higher, and not the other way round.


Opportune LLP says the U.S. economy is headed for pandemic-induced hyperinflation, arguing that what took five years to do with the last QE has now been duplicated in less than a year. The analysts say that with such rapid expansion of the money supply, it's only a question of when hyperinflation will hit.

Source: JD Supra

The analysts say that their models currently value West Texas Intermediate (WTI) crude oil in the $90/bbl range. 

But here's where it gets interesting: The experts argue that given the government's insatiable appetite for spending, the dollar could be set for massive devaluation that will propel WTI prices north of $180/bbl by the end of 2022.

We are not quite sanguine about those ultra-bullish projections for the simple reason that they would not go down well with the  Biden administration.

According to petroleum analyst Patrick De Haan of GasBuddy, one-hundred-dollar oil today could get us close to the $4 per gallon mark. The $4 threshold is regarded as an unmistakable pain point for drivers, with $4.17 being the all-time high for gas prices after oil prices hit $145/bbl in the summer of 2008.

By Alex Kimani for Oilprice.com

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