What’s On Our Minds This Week

Lost in all the back-and-forth news flow around tariffs and the inflationary/recessionary implications of a global trade war is the sharp decline seen year to date in the price of oil. Despite a 3% bounce on Monday morning after some promising developments on the trade front, West Texas Intermediate (WTI) crude oil is still down over 11% year to date and down over 50% from highs in a distinct downtrend that began nearly three years ago. Since the advent and embrace of shale drilling technology and the return of the United States as a dominant producer, Saudi Arabia, the leader of the OPEC+ and Russia cartel, has lost most of its power as the swing producer with the ultimate control over price. With rampant cheating on assigned quotas, the Saudis appear to be throwing in the towel in the yearslong effort to drive and support the price at higher levels.

Adding to downward pressure on oil prices due to prospective supply effects, global demand appears to be slowing as China, the primary driver of commodity inflation through its tremendous growth during the first two decades of the 21st century, continues to slow due to both cyclical and secular challenges. We will leave the negative implications of additional weakness in the oil price to our equity analysts, but the implications for inflation from a macroeconomic perspective appear unequivocally good and can serve as a strong offset to any inflationary consequences of tariffs and supply chain interruption due to escalation of a global trade war. Geopolitically, lower crude prices may also more quickly drive Russia to the bargaining table to negotiate a peace settlement with Ukraine.

Based on the most recent Federal Open Market Committee meeting held last week, the Federal Reserve (Fed) continues to struggle managing both its price stability and employment mandates in this highly uncertain environment of tariffs and potential trade wars. While monetary policymakers concentrate on core prices—excluding food and energy—when assessing the inflation landscape, persistently lower crude oil prices will drive down headline inflation and help revive the frustratingly stalled disinflationary progress toward the Fed’s targets. This likely provides sufficient cover for the Fed to turn its attention to the employment mandate in a slowing economy and restart the monetary ease program begun last year—perhaps as soon as next month’s meeting. Regardless, lower gasoline and heating oil prices will likely help improve flagging consumer confidence now that we have seen some progress in trade negotiations.

Past performance does not guarantee future results.