Weekly Update – 3/27/2015

Macro Commentary

 

3.27.15

Oil prices climbed this week as bombs fell.  Saudi Arabia’s air support over Yemen against Shiite rebels reminded the world that geopolitical risk is less than a stone’s throw away.  Yemen is a minor oil producer but sits on one side of a narrow strait through which 3.8mm barrels pass through every day.  Despite the distance from the conflict, US oil prices (measured by West Texas Intermediate or WTI) climbed over 12% during the week.  Geopolitics are a fickle driver of prices, however.  Despite it only being the second day of bombing, investor attention already shifted to the evolving discussions with Iran over nuclear material.  An accord there would likely increase the availability of oil on the market as sanctions are lifted.  The result was an approximate 5% decline today alone (leaving oil prices still higher for the week).  History has shown geopolitical premiums as coming and going in oil prices.  Sustainably higher oil prices require the supply/demand imbalance to be whittled away.  We continue to believe that we will not see that show up in the numbers for several more quarters yet.

 

Meanwhile, Japan has also struggled to see their inflation rise.  After adjusting for last year’s sales tax, the core consumer price index in February registered flat year-over-year (while posting 2% headline without the adjustment).  Despite years of ultra-supportive central banking activity (and that is saying something) and tremendous talk of reform, the economy is yet to see the effect.  Whether the Bank of Japan sees it as another reason to press down on the gas pedal of a quantitative program already running at high speed should be watched, as does the potential consequences.

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