PPI Index Results Highlight Dilemma for Oil Prices
Today, the Bureau of Labor Statistics released the March Producer Price Index that increased 1.0%, seasonally adjusted. Not seasonally adjusted, the index increased 1.2%. Importantly, the annual increase, unadjusted, was 4.2%, the largest advance since rising 4.5% for the 12 months ending September 2011.
The March increase was driven by a 1.7% rise in prices for finished demand goods, which was led by a 5.9% jump in energy prices. What is troubling is that final demand less food, energy, and trade services rose 3.1%, matching the largest historical advance since the 12 months ended September 2018. What drove the March increase was a sharp rise in the prices of many materials – industrial chemicals (+10.1%), steel mill products (+17.6%), lumber (+6.2%) and carbon steel scrap (+11.2%).
The sharp price increases for energy, materials, and other commodities have many people wondering whether we are starting the next commodity super-cycle. If so, what does that mean for oil prices? The answer is dependent on the impact rising commodity prices have on global economic growth and inflation, which will influence the level of interest rates.
The International Monetary Fund just raised its global growth projection by half a percentage point to 6.0% for 2021, and by 0.2% to 4.4% for 2022. The higher growth rates reflect the IMF’s view that increasing vaccinations worldwide enable a reopening of economies and a return to a more normal existence, coupled with the consumption boost from massive financial stimulus by governments in response to the pandemic.
Despite the higher growth forecast, oil prices are flattish around $60 per barrel. Oil prices were knocked down slightly by the decision of OPEC+ and Saudi Arabia to begin adding more supply to the market at the same time France and other countries announced renewed economic lockdowns to fight the virus. If the IMF’s forecast proves accurate, global oil consumption will rise despite the push for more electric vehicles and clean energy fuels for other transportation sectors. That will provide upward momentum to oil prices.
Countering that upward pressure is fear that rising commodity prices will spike inflation and drive global interest rates up. Higher rates will pressure governments who are sustaining their substantial spending with increasing amounts of debt. A too early withdrawal of financial support, coupled with a rising cost of living, could crimp spending and, in turn, energy consumption, especially the amount generated by discretionary spending. Until we have more evidence that rising raw material prices and energy costs will not undercut economic activity and energy use, it is difficult seeing oil prices doing much more than treading water.