INCREASING INFLATION: OPEC

In October 2022, my market update included notes on OPEC's decision to cut production by 2M barrels a day. At the time, the US is extended the use of the Strategic Petroleum Reserve for another month to help keep oil prices low. The Strategic Petroleum Reserve (SPR) was established to "protect the economy and strengthen national security during major oil supply disruptions." In 2022, more than 220M barrels were withdrawn from the reserve. Our oil reserve is now at the lowest point its been since 1983. The current administration announced its intent to refill the reserve when prices ranged between $62-72 per barrel. They could begin refilling the SPR by Q3, this year. 

Two weeks ago, Saudi Arabia told oil short sellers to "watch out." This came right as oil prices dropped back into that $67 to $72 price area where the US intended to refill the SPR. The administration didn’t follow through.

We all love low oil prices. Last year’s SPR release helped keep our tanks full at reasonable prices. The risk of buying back that oil is that oil prices could rise quickly. Not refilling the SPR leaves the U.S. with a less insurance against an oil supply disruption. Many consider this a geopolitical threat.

Over the weekend, Saudi Arabia announced they are cutting oil production. What happens when we cut supply? Demand for fuel remains high, prices will rise. This can certainly become an added burden for the American people, but also, bad for inflation.

“Oil prices that go too high can fuel inflation, sapping consumer purchasing power and pushing central banks like the U.S. Federal Reserve toward further interest rate hikes that can slow economic growth.”

— AP News

“The current market pessimism stands in stark contrast to the tighter market balances we anticipate in the second half of the year, when demand is expected to eclipse supply by almost 2 mb/d,” the IEA said in its latest Oil Market Report of May. 

CONFLICTING JOB NUMBERS

The Bureau of Labor Statistics (BLS) reported that there were 339,000 jobs created in May, which was much larger than estimates. Job growth in March and April was also revised higher, adding 93,000 additional jobs in those months combined. The unemployment rate rose from3.4% to 3.7%.

There are two reports within the Jobs Report and there is a fundamental difference between them. The Business Survey is where the headline job number comes from, and it's based predominately on modeling and estimations.

The Household Survey, where the Unemployment Rate comes from, is derived by calling households to see if they are employed, so it’s a bit more real-time.

The Household Survey has its own job creation component, and it showed that there were 310,000 job losses, which is a stark contrast to the headline job growth number.  

In addition, one of the biggest reasons we saw job gains in the Business Survey was the birth/death model. The BLS estimates hiring from new business creation relative to closed businesses.

The problem with this model is it overestimates during the inflection point of a downturn (like we are in right now). It also underestimates at the inflection point of an upturn, after a recession.  

In May, this modeling added 231,000 jobs but it’s hard to believe that many businesses were created last month in the current economic climate where there is less lending from banks.

Take a look at the chart below. 412,000 job “losses” in self employed. This explains all the job "gains" in the establishment survey. If you are self-employed, and you take a part-time or full-time job to make ends meet, you count as “no change” on the survey. Since last May, 808,000 self-employed people stopped working for themselves. Over 400,000 last month alone.

If you’re looking for a job, you are in the labor force. As the number of people looking for work rises, the unemployment rate rises. The labor force, not just the number of job openings are important to watch.

Rising unemployment is a signal for the Feds to stop hiking rates.

Article Written and Provided by Padi Goodspeed with Cross Country Mortgage