One For Oil, Oil For One

If you’re a homeowner hoping energy prices are going to drop off, we have some bad news for you. But if you’re an investor hoping they won’t, then walk this way…


🕰 Recap

  • The oil price has been surging this year, hitting $120 a barrel for the second time in a couple of months on Monday.
  • That’s providing a profit windfall to energy firms, and they’re choosing to give that cash to shareholders through dividends and share buybacks.
  • But those higher energy prices are complicating central banks’ efforts to control sky-high inflation.


✍️ Connecting The Dots

Oil was getting more and more expensive even before Russia’s invasion of Ukraine, as recovering economies clamored for the limited supply that’s out there. But those supply issues became a whole lot worse after many countries implemented outright or partial bans on Russian oil. That sent its price soaring to a 14-year high in March. And it’s not just the slippery elixir: the same supply-demand dynamics have sent natural gas prices spiking too.

Now, you’d think that things would even out soon, but the worst may be yet to come. That’s because demand for oil and natural gas is expected to keep rising in the next few months: driving and air conditioning tend to peak in the summer in the northern hemisphere, pushing up the demand for gasoline and natural gas-generated electricity respectively.

Adding fuel to the literal flames is that scientists are already certain that 2022 will be one of the 10 hottest years on record, with summer temperatures expected to be much higher than normal. The problem is that energy supplies are so limited that there won’t be enough to go around, meaning plenty of countries are going to suffer from power cuts. A recent heatwave in Asia, for example, caused hours-long daily blackouts that affected more than 1 billion people across Pakistan, Myanmar, Sri Lanka, and India.


🥡 Takeaways

1. Central banks can’t catch a break.

The combination of a supply-demand imbalance and extreme weather could lead to another big jump in energy prices, which could itself complicate central banks’ efforts to tame inflation. Right now, major central banks are aggressively raising interest rates in an effort to lower demand, which should in turn slow down rising prices. Those hikes work fine if inflation is being caused by excessive demand, but they won’t do much to tackle what’s called “cost-push inflation” – when overall prices rise because the cost of wages and raw materials goes up. That’s exactly what we’re seeing here.

2. Big Oil is loving it.

Oil giants aren’t complaining, and nor are their investors: higher energy prices have led to higher profits, and that cash is funneling back to shareholders in the form of dividends and share buybacks. BP boosted its share buyback program by $2.5 billion last month, days after TotalEnergies pledged to buy back $2 billion worth of its own stock by July. Not wanting to be outdone, Exxon Mobil tripled its own program to a whopping $30 billion. Governments aren’t impressed: they’re pressuring energy companies to invest the money into oil production instead, as consumers feel the pinch of surging prices at the pump.


🎯 Also On Our Radar

Retailers are already seeing their profit margins eroded by inflation, but the sector is suddenly facing another challenge: selling all the products they’ve stacked up. According to Bloomberg, retailers like Walmart and Target saw their inventories balloon to $45 billion last quarter – up 26% from a year ago. That could be helpful if supply chains deteriorate again, but changing tastes and consumer belt-tightening could leave retailers with a glut of merchandise people just don’t want.

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