During their latest episode of the VALUE: After Hours Podcast, Kao, Taylor, and Carlisle discuss Oil/Inflation/USD-Clash of the Titans – Fed vs OPEC+. Here’s an excerpt from the episode:
Michael: At some point, I do think that there is the risk that we have a very sustained period of high commodity prices. Now, I say it’s nuanced because in the short-term, I see lots of deflationary effects. I’ve written at length on Twitter about this, where you’ve got essentially a clash of the titans between the Fed and OPEC+. I personally think that OPEC+ acted way too soon.
I jokingly called it a premature emasculation, because– Here, we get into economics a little bit. I really like to think big picture.
I respect all the people that do the fundamental barrel counting. I try to synthesize that, but really look at the bigger picture of thinking about supply demand framework and what OPEC+ did I think was to avert short term pain at the expense of long-term gain. Because if you think about where we were before the OPEC+ decision, we had a very backward dated forward curve, which implies a very inelastic supply curve.
So, what happens when to prices, when an inelastic supply curve meets a downward demand shock, possibly from Fed hikes and synchronized central bank hikes causing a demand destruction of everything, not just oil? Well, that results in a very, very sharp price drop. That’s exactly what happened.
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