Schork Oil Outlook: Don’t Worry Inflation Hawks, the Fed Is on the Beat

After reading the last few FOMC statements, we get the sense that the Fed is acting like a traffic cop at the scene of an accident, ushering gawking motorists along… nothing to see here folks, just keep moving on.

For instance:

… concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.

—FOMC, April 27th Text

Sugar prices are up 108%, coffee is up 96%, corn up 96%, soybeans up 48%, wheat up 45%, orange juice up 31% and beef is up 16½% (RJ/CRB Index).

Nothing to see here people, longer-term inflation expectations are stable. After all, the latest generation IPod will cost you no more than the first generation. Ha, go chew on that, you inflation-Cassandras!

Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations.

—FOMC, April 27th Text

Gasoline on the futures market is 47½% higher and heating oil is 38% higher. On the consumer level, gasoline at the pump is 38% higher and diesel fuel is 31% higher.

Come on people, keep moving, the rise in energy costs is transitory. Never mind that the term structure is showing concern of tightening in global supplies of oil. No need to fret, the Fed is paying close attention.

Analysts at The Schork Report question how the Fed defines “transitory” - the year-on-year inversion in the forward curve (from contango to backwardation) of crude oil prices indicates that the market is pricing in a rather lengthy rise in price!


Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.