One of the key factors that has been driving the perceived inflation scare has been the rise in oil prices. However, there are a number reasons for oil’s rise to face headwinds over the coming weeks. Take a look at these reasons below.
- According to Bloomberg, the Chinese storage capacity for oil is near capacity. The low prices for oil had been an opportunity to buy it in cheap, but the tanks are nearly full.
- The dollar keeps rallying. Either expectations of faster interest rates or safe-haven flows kept the USD supported last week. This is a headwind for oil.
- Shale can come back online as oil prices rise. If shale supply grows that is another headwind for oil prices.
- Rising COVID-19 cases in Europe, The more these cases build, then the less oil needed as lockdowns return for the eurozone.
The driver for higher oil prices is that OPEC may roll over production cuts if the oil prices keep drifting lower. That can limit falls, but eventually, the supply will need to come back online.
For years markets have expected rising inflation. However, globalisation has largely kept that under control. It is worth noting that US core CPI is pretty flat and not showing signs of rising inflation. Recent data from the UK and Canada have shown the same thing. Inflation is pretty flat and weaker oil prices take away a key driver. Worth noting. US CPI below: