THREAT: Brent oil back over $115/barrel, with OPEC+ to keep supply tight, Russian sanctions extended, and China growth fears easing. Futures are bullishly heavily backwardated. Whilst fear of a US gasoline spike towards $6/gallon are rising, on chronically low US refining capacity and inventories as the summer ‘driving season’ starts. This is a threat to a quick fall in inflation, the resilience of near-record corporate profit margins, but also a positive for energy equities (XLE).
INTENSITY: The fact $100+ oil has not tipped the world into recession, as in 1970’s, speaks to the flat inflation-adjusted oil price, and sharp falls in energy intensity of our economies in recent decades, driven by production efficiencies and shift to services. The efficiency improvement from US, China, Germany been 62% past forty years (see chart). The annual global improvement is 1.5% a year. Whilst the lowest energy intensity is in Europe, a buffer to current energy crisis.
IMPLICATIONS: Our ‘high-for-longer’ oil price view means 1) Stickier-for-longer inflation, wary central banks, volatile markets, uncomfortably high recession fear. 2) Inflation hedges from commodities (DJP) to dividends (HDV) supported. 3) Rising fossil fuel demand destruction and a prioritization of renewables energy security (@RenewableEnergy). 4) Some Europe (EZU) resilience to recession fear, with buffers from FX to fiscal policy, and its low energy intensity.
All data, figures & charts are valid as of 31/05/2022