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Russel asks:

Any reason why the Saudi’s are allowing the price of oil to slide?

Just a guess. The futures liquidations were large enough such that holding spot prices up and letting futures free fall would have made it obvious the Saudis are price setter.

There also could be some liquidation of physical inventory going on in which case they would have to let inventories fall before resuming control of prices, or else actually buy in the spot markets which is out of the question of course.

It’s like if some pension fund had a hoard of NYC subway tokens and decided to sell them ‘at the market’. The price would go down from the current $2 price until that selling pressure abated. Then the price would go back to whatever NYC was charging.

So most likely they just let this inventory liquidation run its course, and then work prices higher again.

Much like happened in Aug 2006 with the massive Goldman liquidation and again in a smaller way at year end back then.

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Jim Baird asks:

Hey Warren,

I noticed the crude spreads have slipped back into contango today. Are the ETFs up to their old tricks?

For sure inventory conditions have shifted, but they always seasonally shift up around this time. Could be ETFs to some degree.

More interesting, if the Fed is still up to their old ways, this would signal to them that markets are anticipating higher prices down the road, rather than elevated inventories, and may nudge them to hike sooner than otherwise.

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Hi Warren,

Do you think there is any chance that the Fed ever puts us into a steeply inverted curve, say something like 10% short rates with 6% long rates? Hard to imagine that happening with the housing market weak, but what do you think?

Very high probability - I’d say 85% chance if, as I expect, crude stays here or goes higher. maybe a lot higher.

Hiking causes inflation to accelerate via the cost structure of business, so when they start hiking, inflation accelerates. Guaranteed!

Only a major supply response will break the inflation. Like pluggable hybrids in 5-10 years or cutting the national speed limit to 30mph, which is highly doubtful.

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