Thought of the Week
Brent crude oil prices closed at $82 per barrel on Friday, and while they have backed off from their springtime peak, they still look high relative to where they were five years ago, before the pandemic. However, it’s important to recognize that almost all prices and wage rates are significantly higher today compared to five years ago. Between May 2019 and last Friday, Brent crude prices rose by 23%, but we estimate that U.S. headline CPI has risen by the same amount. Therefore, in a very real sense, $82 per barrel is the new $63 per barrel.
This week’s chart illustrates this by showing that real oil prices, excluding the shocks of the pandemic and Russia/Ukraine War, have remained relatively stable. In May 2019, a barrel of Brent crude cost $67 and, measured in constant May 2019 dollars, a barrel of oil today would cost $72 per barrel.
Going forward, oil prices will still be vulnerable to supply and demand shocks. The conflict in the Middle East could continue to threaten supply, but so far, it has not materially impacted oil prices. Additionally, OPEC decided to extend its voluntary supply cuts over the weekend, increasing uncertainty about future supply. On the other hand, demand pressures should be relatively steady. The Energy Information Administration expects global oil consumption to rise by only 0.8% in 2024 and 1.5% in 2025, reflecting, in part, sluggish Chinese demand growth, and global oil production should be able to handle demand growth of this magnitude. While the oil market remains volatile, oil in the $80s better reflects the impact of past inflation rather than portending an inflation surge ahead.
The week in review
- Consumer confidence rose to 102 in May
- PCE rose 0.3% m/m (2.7% y/y) in Apr.
The week ahead
- JOLTS
- ISM services PMI
- Employment report
Chart of the Week: Source: BLS, CRB – Commodity Research Bureau,
J.P. Morgan Asset Management. Real Brent crude oil prices were
calculated by deflating monthly Brent crude prices by the headline
Consumer Price Index reported by the BLS.
Thought of the week: Source: BLS, CRB – Commodity Research
Bureau, Energy Information Administration, J.P. Morgan Asset
Management.
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Originally Posted June 3, 2024 – Weekly Market Recap
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