Today’s energy crisis is creating inflation and recession risk. Interest rates are rising in response, as the chart shows for US 10-year bond prices:
- Last week, the US Federal Reserve hiked US rates for the first time in 3 years
- And they are expecting to make further increases in the next few months
- They don’t expect inflation to come back to their target 2% level until 2029
Even that seems optimistic at the moment.
- As the chart shows, the Fed is already well behind the curve
- Market rates for the benchmark 10-year bond have been rising since 2022
- And now they have hit the 5% level, as expected last week
DIESEL PRICES HIGHLIGHT THE RISKS AHEAD
US diesel prices hit another record last week at $6.40/gal. They have nearly doubled from $3.50/gal in January:
- Diesel is critical for the global economy – it is ~30% of total oil demand
- And central banks can’t simply print more diesel as Bloomberg note:
- “Right now, the world wishes it had a diesel printer as two wars — US-Iran and Russia-Ukraine — combine to create an enormous shortage, pushing the cost of the fuel to all-time highs”.
The trucking industry takes half of this output, with railway freight, construction, factories, mining and agriculture all big users.
And now, actual shortages are starting to appear as the New York Times reports in countries as diverse as Indonesia, Guatemala, The Philippines, Bangladesh, Sri Lanka, Syria.
Fuel shortages and long lines at the pump are slowing economies. Taxi drivers and laborers see no point in working when their earnings barely cover energy costs.
Poorer Western countries such as Portugal are also starting to be impacted as costs rise, creating new political risk.
SHIPPING RATES FOR CRUDE OIL HAVE GONE PARABOLIC
Shipping rates for VLCCs ( Very Large Crude Carriers, carrying up to 2mb) have also gone parabolic as the LloydsList chart shows:
- The West Africa – China VLCC index was $110/day before the Israel/Iran invasion
- Last week it had spiked to an astonishing $509k/day
- The VLCC shortage is now pushing up prices for the smaller vessels
- Suezmax rates have risen from $70k/day to $238/k
This adds to the energy crisis and inflation risk.
HIGHER FUEL COSTS ARE INCREASING INFLATION
Freight costs are already starting to impact global inflation as the chart shows.
- VLCC costs now equal an almost unbelievable $20/bbl of oil
- Diesel prices have now hit an all-time record of $200/bbl
- Refinery margins are now ~$100/bbl, versus normal levels ~$20/bbl
Inflation is inevitably starting to rise:
- China’s PPI has risen from -0.9% in February to 3.8% in August
- CPI costs around the world are now increasing as these costs are passed through
- And, of course, the refinery outages in Russia and the Gulf are adding to the squeeze
There seems no sign that either war will end soon. Companies and investors need to plan for further disruption and much higher costs, as today’s higher oil and transport costs are passed through the value chain.
Sadly, global recession now also seems increasingly likely.