Here we go again. We’re not even into the seasonal strong period for energy and we’re already seeing a surge in prices. This surge in prices forces an immediate reallocation of consumer income and has the potential to significantly weaken consumer spending on other goods and services. Thus far Brent prices have remained relatively muted when compared to WTI and the gasoline market has also remained relatively depressed. But UBS wonders how long this situation can last if the WTI continues to rally. They say the impact could be a “very nasty” squeeze for the economy (via Martin at Macronomics):
“The attached chart shows the premium of Brent to WTI has narrowed from 17.88bbl on the 14th October to just 9.7 now. US crude and product inventories are reported down a combined 8.7m barrels last week after a 15.3m draw the previous week, taking reserves down to 1736.7, the lowest since the 7th January 2009. WTI is still at a large discount to historic levels, but with domestic land-locked inventories falling rapidly, how long before the spread disappears, and more importantly how long before this US inventory collapse starts to lift the broader oil market, and just how much of a drag will that be on the broader economy? Brent is already getting back to its 2008 high in euro terms and is clearly making life very difficult so another squeeze could be very nasty.”
We’ll have to revisit this situation in the new year. Thus far it’s nothing to get overly alarmed about, but that could all change very quickly as we saw last year….
Source: UBS
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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