We attribute this performance in commodities (.. or inflation to be frank) to the financial market illiquidity that has perpetuated supply chain constraints despite the classical assumption that tighter financial conditions yield an “easing” effect on supply chains via demand reduction contrary to the popular belief that US inflation is demand driven. For context, real consumer spending has grown 2.6% per annum since the pandemic, in which the pre- pandemic levels saw a 2.4% growth rate (2 years leading).<\/p>\n\n\n\n
Deep dive into the Components <\/h5>\n\n\n\n
When we look at CPI composition it is no mystery that energy was by far the largest contribution to the 8.3% YTD print for April 2022 with the energy index rising 30.3 percent over the past 12 months, the gasoline index increasing 43.6 percent, the fuel oil index rising 80.5 percent, and the index for natural gas increasing 22.7 percent over the last 12 months (04\/21-04\/22).<\/a> Where supply-side constraints have been levied by historically low E&P CapEx in the sector, oil and gas firms have been “running on fumes” from an inventory standpoint as well as the sector from an aggregated standpoint. Even though inventory turnover has been generally well in this environment, many firms would like to take advantage of the current prices (given that consumers buy at spot prices), and the only way to increase supply sources in a timely manner is to embark on an aggressive increase in E&P CapEx (I.e., Venture Global’s $3.4 billion Plaquemines LNG Project)<\/a>. This only is done at the opportunity cost of taking advantage of the recent remarkable equity outperformance via capital restructuring in aim to add perpetuity to free-cash-flow yields; in which could create a goldilocks environment for oil and gas investors as this could prolong market price trends and prove as a hedge for firms against the 1m\/6m spread in oil futures sitting at around $24\/bbl (which indicates that oil futures are pricing in our initial scenario of increased CapEx, and or potential demand destruction). <\/p>\n\n\n\n
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