Stagflation
Stagflation (high inflation rates at the same time the economy has high unemployment rates) has had, and will continue to have a greater bearing on pushing crude oil up to $50, and higher thereafter into 2017. In a stagflation environment, an increase in aggregate demand, a decrease in supply, or other factors that affect supply and demand schedules are not necessary conditions for higher prices. This fact alone can push WTI Crude Oil (CL / USO) prices much higher in the short term and is also reinforced by prices naturally reverting to the long term mean. The term Stagflation is a portmanteau of the terms stagnation and inflation, and was coined by economists during the Carter administration of the 1970s, wherein for the first time in its history the nation's economy was simultaneously in recession with inflation rising. It seems as though this phenomenon has reappeared, disguised. For instance, as opposed to the 1970s, government spending, M2, debt-to-GDP, government spending as a percent of real GDP growth, and nominal public debt are at all time highs; while real GDP growth and real wages during the past eight years are at all-time lows. Such circumstances leaves any potential real growth dependent upon sustained unsustainable debt-finance spending, which adds considerably to future price inflation.
A Hesitant Fed
An unlikely Fed hike in 2016 also puts future downward pressure on the USD and corresponding upward pressure on Crude prices. As mentioned above, real GDP growth is at an all-time low (sub-three percent for eight consecutive years), giving the Fed little if any margin for error in terms of causing a recession by raising rates prematurely (primarily in an election year). A recession before the general election equates to a major blunder for Obama, and consequently a blow to Hillary Clinton's chances at becoming POTUS. A rate hike induced recession is also likely to bring the Fed's credibility in question - an issue Donald Trump has already raised on the campaign trail and is likely to revisit in one form another during the debates. Likewise, the Fed's credibility would suffer even greater public scrutiny should they decide to raise rates, only to have reverse their position and cut again. Hawkish interest rate policy is virtually out of the question, as it risks putting undue upward pressure on the dollar and decreasing both M2 and total output as a result. Sub-three percent growth coupled with low relative productivity does little to persuade Yellen and the FOMC to rein in any potential increase in GDP growth that they may be lucky enough to muster up.
ECB and BOJ
Current ECB and BOJ monetary policy would aggravate any hawkish policy decision by the Fed. Domestic conditions that appear conducive to a rate hike will likely be offset by global conditions which are underpinned by unprecedented dovish policy by the ECB and BOJ. Both central banks have stated repeatedly that they will print an infinite amount of paper to keep their currencies relatively low in order to prevent a deflationary spiral. Unfortunately, the Fed has the same policy, and wishes to avoid deflation by any means necessary. As a result, an interest rate hike as small as 50 basis points can result in a compounded effect of the USD being bid up to unsustainable levels, as the USD is believed to be a safe-haven currency and as investors pile into the dollar in a desperate search for yield, which will only be exacerbated in an environment of negative rates and near-zero growth. As long as the ECB and BOJ maintain a monetary policy regime intended to avoid deflation at all costs, the Fed will be in the same boat with very little incentive to rock it. A strengthening dollar in such a scenario implies a relatively weaker EUR and JPY, which threatens to reduce the effectiveness of the Fed's ZIRP.
Simultaneous unprecedented monetary policy from the world's largest central banks, the red flags of signs of the reappearance of stagflation, and a justifiably hesitant Federal Reserve, combine to form the ideal catalyst for higher crude prices, regardless of the marginal supply/demand outlook. As evidenced by the ineffectiveness of the Doha talks between Russia and Saudi Arabia in terms of affecting the outlook of future crude prices, obstacles to higher prices in the near future are increasingly insignificant.
@HalftimeReport buy $CL_F on the dip, sell it at 50. short the Qs, buy it at 103 @petenajarian @ReformedBroker— Rubin (@rubinoftoronto) May 3, 2016
