Despite Analyst’s Opinion, Inflation Fears Are Not Behind the Current Oil Price

On August 19, 2009, CNBC reported:

The price of oil could slump toward $20 as the fundamentals supporting it are still extremely weak and its currently only being held up by fear of inflation, Johannes Benigni, managing director at JBC Energy, told CNBC.

"People are scared of inflation, that's why they are buying oil and other commodities…," Benigni said.

Although the price of crude oil may be running above levels implied by fundamentals such as global consumption and global crude oil stocks, and such a situation would be consistent with the tendency for markets to overshoot, survey and swaps data indicate that inflation concerns are not the explanation for current oil prices.

• The median expected increase in prices over the July 2009-July 2010 timeframe in the University of Michigan survey of consumers was 2.9%. That was down from the previous month’s figure of 3.1%.

• U.S. Dollar Inflation Zero Coupon securities also paint a picture of low, tame inflation. The 1-year, 2-year, and 5-year figures on August 19 were 1.23%, 1.10%, and 1.56% respectively. The 10-year figure was 2.44%. That data suggests that investors are expecting inflation to remain contained in the near- and medium-term, and generally near levels compatible with price stability a decade out.

Finally, if one examines recent news stories concerning recent oil market developments, market psychology rooted in expectations for an improving global economic outlook may be an important driver of crude oil prices. Three recent examples from The Wall Street Journal:

July 24, 2009 edition: “Although the economy is still in a slump, investors were galvanized by a third monthly increase in existing-home sales in June…”

July 31, 2009 edition: “Crude-oil futures shot up, reversing sharp losses from the prior session as rising confidence in an economic recovery displaced concerns about weak oil demand.”

August 4, 2009 edition: “Crude-oil prices settled at a six-week high, as the dollar dropped to its lowest level against the euro this year amid optimism about the outlook for the world economy.”

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