ELAM: Inflation jumps to 13 year high

The US Economic re-bound is driving the biggest surges in inflation in 13 years, consumer prices rising 45% from a year ago.

WSJ Headline Friday

And thirteen years ago was 2008 when oil prices soared to $140 by June and then collapsed to $35 by Christmas. Indeed, WTIC finally closed above $70 this week. Several factors support the run-up in price.

People are travelling again in the post COVID world so demand for all types of fossil fuels are up.

Refiners like Valero are concluding they should produce less gasoline and more environment friendly green diesel from vegetable oil.

Team Biden killed the Keystone Pipeline which would have provided more oil to U.S. Refineries.

Supplies of oil and gasoline are shrinking as a result of all the above.

Remember that crude oil is both an economic and a financial good. So the price of oil can rise on both demand and sheer speculation via options, futures, and energy shares. Which takes us to a report in Tuesday’s WSJ.

A call option is a bet that prices will rise. There are more than 60,000 call options for December 2022 with a strike price of $100. That would account for 60 million barrels of oil. There are16 million of the same price for December 2021. The higher the price of oil rises towards $100, the more these options will be worth, assuming it happens before the two December expirations.

Oil last traded over $100 in spring 2014. With no lack of supply, prices cratered to $30 by 2016, bankrupting frackers and energy service companies. Some traders are extending the risk frontier by selling puts under $60 to finance the purchase of the $100 calls. Should the market reverse, they will be in big trouble.

Team Biden has increased the cost of the upcoming vacation season as unleaded gasoline futures have risen from $1.00 to $2.20. This suits the climate change crowd by making it more expensive to drive your car.

Decades ago Milton Friedman popularized the notion that the money supply drove inflation. The more the money supply expanded, too many dollars were chasing too few goods. The money supply has expanded 31% since 2019 and federal spending has increased 50%. That is surely inflationary as Congress does not have 50% more money to spend, it is borrowed. And now Democrats want to spend a few trillion more.

As noted last week, oddly interest rates are still falling, bond prices advancing. Don’t expect that to last much longer. Once rates turn higher the FED will get a lesson that the market is in charge, not a bunch of DC appointees.

The rest of the year should be quite interesting.