$100 oil?
1: Could oil hit $100?
The chart below compares oil prices and oil sector capital expenditures (i.e. investment in exploration and drilling).
The blue line is really what I want you to focus on. Capex has relentlessly declined since around 2010 and today sits at historic lows. This lack of investment will result in lower production volumes hitting the market and less spare capacity to ramp up supply when prices rise. It’s simple: supply vs demand. With demand predicted to hit 100 million barrels a day this year, oil prices could hit triple-digits.
2: Interest rate sensitivity at record highs
Most investors know that when yields rise, bond prices fall. To what extent depends on a bond’s sensitivity to changes in interest rates (duration).
Duration changes with yields, coupons and timing of cash flows. All things equal, a bond with a lower yield will have a higher duration (because the weight of future cash flows is skewed toward the bond’s maturity date). With yields close to historic lows - currently the US 10yr is around 1.8% - bond durations are much higher than in the past. This means that the bond market’s sensitivity to interest rate changes is much higher than in the past, therefore yields don’t need to rise by much to materially impact bond prices.
3: Where’s the inflation?
Inflation appears to be hitting people who eat or drive the most. Sooo, pretty much everyone.