Category: Countries & Regions

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Fed shock – really?

Stocks plunged on indications that the Fed would slow further rate cuts after announcing a 25-basis-point cut at the FOMC press conference on Wednesday.

Really? That could be seen coming for months. The economy has proven resilient, unemployment is low, and retail sales are growing. The obvious question is: “Why cut rates at all?”

FOMC Decision

As expected, Chairman Jerome Powell announced a 25-basis-point rate cut, lowering the fed funds rate target to 4.25% to 4.5%.

Financial markets were spooked by the sharp jump in FOMC projections for rate cuts next year. The Dot Plot now centers on a further 50 basis points of rate cuts in 2025, a target range of 3.75% to 4.0%.

FOMC Dot Plot

Compare that to the September projection below, which was equally divided between 100 and 125 basis points of cuts next year, a range of 3.0% to 3.5%.

FOMC Dot Plot - September

Powell explained that:

  • The economy is “strong” and has made good progress towards the Fed’s goals.
  • The job market has cooled but remains “solid.”
  • Inflation continues to move towards the Fed’s 2% target.

The Fed Chair provided further background in answers to reporters’ questions:

  • “We feel that slowing the pace of future adjustments seems prudent now, especially as we expect inflation to be stickier than we initially thought.”
  • “Some FOMC members did cite future inflationary fiscal policy as a concern.”
  • “Most forecasters keep calling for a slowdown in economic growth, but we haven’t seen it yet and don’t see one happening soon. The US economy is doing great.”
  • “We’re not too worried (about loose financial conditions). Both inflation and labor have cooled, so our policy is working. Financial conditions aren’t impeding us.”

Fed Balance Sheet

Powell announced that QT would continue at the same rate, but the rate offered on reverse repo (RRP) would be lowered, which may encourage further money market outflows into the T-Bill market. Total Fed holdings of Treasuries and mortgage-backed securities (MBS) have fallen by $1.9 trillion since their peak of $8.5 trillion in 2022.

Fed Balance Sheet: Treasuries and Mortgage-Backed Securities (MBS)

Only another $6.0 trillion to go. 😟

Treasury Markets

Ten-year Treasury yields jumped. Breakout above resistance at 4.5% would offer a target of 5.0%, which would be bearish for stocks and precious metals.

10-Year Treasury Yield

Stocks

The S&P 500 plunged to support at 5860. Breach would signal a test of 5700.

S&P 500

Tesla (TSLA) dipped sharply after a spectacular two months, peaking at +117%, compared to Nvidia (NVDA) at -6.6%.

Top 7 Technology Stocks

The weekly chart of the equal-weighted S&P 500 index ($IQX) shows a breach of support at 7150, likely headed for a test of 6900. The lower Trend Index peak identifies selling pressure but is still above zero, indicating that the primary trend remains intact.

S&P 500 Equal-Weighted Index - Weekly

Financial Markets

The Chicago Fed National Financial Conditions Index dipped to -0.66% on December 13, indicating “loose” monetary conditions. Moody’s Baa corporate bond spreads are also at a thirty-year low, reflecting easy credit conditions.

Chicago Fed National Financial Conditions Index & Moody's Baa Corporate Bond Spreads

Bitcoin retraced to test support at $100K, but the strong uptrend still signals abundant financial market liquidity.

Bitcoin (BTC)

Dollar & Gold

The Dollar has strengthened in response to rising Treasury yields, with the Dollar Index breaking resistance at 108.

Dollar Index

The Bank of Japan may be forced to raise interest rates again to support the Yen, which could cause an outflow from US financial markets as carry trades unwind.

Japanese Yen - Weekly

Gold broke support at $2,625 per ounce, signaling a test of primary support at $2,550.

Spot Gold

The long-term uptrend, shown on the weekly chart below, remains intact.

Spot Gold - Weekly

Silver similarly broke support at $30 per ounce, but a breach of primary support at $26.50 remains unlikely.

Spot Silver - Weekly

Conclusion

The Fed is riding a wave of deflationary pressure from the global economy, led by China. The bear market in crude oil and copper signals that global demand is contracting. Low inflation should enable further rate cuts next year, but the pace will likely slow as the Fed is wary of a resurgence in domestic demand.

The prospect of inflationary economic policies from the new administration could set off a public feud between Donald Trump and the Fed chairman. Stimulating an economy that is already close to full employment would force the Fed to hike rates to ease inflationary pressures, attracting the ire of the new president.

US financial markets, with rising long-term Treasury yields, are sucking up global liquidity and more than offsetting Fed tightening (QT). The strong Dollar increases pressure on international borrowers in the Eurodollar market as domestic exchange rates weaken. The Bank of Japan may also be forced to hike interest rates again to support the Yen, causing further unwinding of the carry trade and outflows from US financial markets.

The S&P 500 is overdue for a correction, but the primary uptrend is unlikely to reverse unless there is a sharp contraction in financial market liquidity.

Gold and silver are undergoing a sharp correction, but the primary uptrend remains intact. Two long-term fundamental trends support precious metals. First, central banks are increasing their gold reserves and reducing currency reserves as the global sovereign debt bubble expands. Second, in response to a collapsing domestic real estate market, Chinese investors are switching focus to gold and silver as a store of wealth.

Acknowledgments

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Weekly Stock Market Snapshot

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The above two dials provide a snapshot of our market view and attitude to risk.

Bull/Bear Market

The Bull/Bear Market indicator improved to 60% from 40% last week.

Heavy truck sales increased to 42,240 units in November, while October sales were revised up to 38,550 from the earlier reported 32,490.

Heavy Truck Sales

Just two of the five indicators now signal Risk-off:

Bull/Bear Market Indicator

Stock Pricing

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile.

Stock pricing continues to rise, reaching the 97.95 percentile compared to 97.83 last Friday. This warns that stocks have the potential for large drawdowns.

Stock Market Value Indicator

Conclusion

The bane of forecasting is data revisions. The collection of data for October heavy truck sales may have been impacted by hurricanes in the Southeastern region of the US.

We are again at the border between a bull and bear market, with our bull/bear indicator increasing to 60%.

However, we do not plan to increase exposure to risk assets because stock pricing remains extreme, warning of the potential for large drawdowns.

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Gradually Then Suddenly

Ernest Hemingway’s 1926 novel The Sun Also Rises contains this snippet, fondly referred to as the Hemingway Law of Motion:

“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”

Niels Clemens Jensen at Absolute Return Partners has published an interesting piece on de-dollarisation. He believes that the US can get away with a lot more bad policy choices than the UK because the Dollar is the global reserve currency:

British investors learned (the hard way) what the consequences are when your Prime Minister mistakenly believes that large-scale tax cuts can be financed with borrowings. Liz Truss tried to do that in October 2022 and, within days, she was history.

You may wonder why the Americans can get away with such things when the British cannot, and the answer is simple. The Americans benefit from the US dollar’s reserve currency status, which means that foreign investors hold massive amounts of US debt but little UK debt.

However, poor policy choices have reduced the Dollar’s role as the global reserve currency. We are past the tipping point, and the shrinkage rate is accelerating.

I am not at all suggesting that the US is about to turn into the next Argentina. Nor am I saying that we are about to witness a repeat of the Liz Truss narrative. The US economy possesses so much talent and so many resources that an awful lot of bad decisions have to be made, before we are even close to an Argentina-like situation.

However, what I want to say with this is that the ongoing de-dollarisation will change the name of the game, and Americans had better realise that the rules are different, if you are no longer the hyperpower of the world.

Despite all Trump’s warnings, a change is underway…..

De-Dollarization

The watershed in de-dollarization may have been in 1971 when Richard Nixon removed the Dollar from the gold standard. However, the rot started earlier, with Lyndon Johnson’s guns-and-butter policies of the 1960s. Johnson prioritized expanding welfare with his Great Society programs but was caught up in the Cold War arms race and the Vietnam War. The conflicting demands strained the US budget, with rising deficits eroding confidence in the Dollar.

President Charles de Gaulle started a run on the Dollar in 1965 when he announced France’s intention to exchange US dollar reserves for gold at the official exchange rate. The French Navy sailed across the Atlantic to collect French gold, setting off demands by other states. This forced US President Nixon to end the convertibility of the Dollar to gold in August 1971 to prevent erosion of US gold reserves.

Removing the gold standard opened the Dollar to currency manipulation. Japan led the way, accumulating large reserves in US Dollars. The weak Yen gave Japanese manufacturers an enormous advantage over their US counterparts in export markets and the US domestic market.

US Current Account Deficit

Japan’s example was followed by South Korea, Germany, and China, forcing the US to run large fiscal and current account deficits to accommodate the excess savings of trading partners.

The supposed benefit of the strong Dollar—low interest rates—fed ballooning debt and rising instability as strains on the US economy increased.

The US net international investment position deteriorated from the world’s largest creditor to the world’s largest debtor.

US Net International Investment Position

The manufacturing sector was dealt a devastating blow, with industrial output plummeting as industry shed millions of jobs. The chart below reflects US manufacturing output relative to real GDP since the early 1970s.

US Industrial Output to Real GDP

The Tipping Point

Historian Niall Ferguson argues that a tipping point is reached when the cost of servicing government debt exceeds the defense budget. According to Ferguson, no hegemon in history has ever restored its previous supremacy after reaching that tipping point. When your economy can no longer support your military, however dominant it is, it becomes only a matter of time.

US Federal Spending on Defense & Interest
US Federal Spending on Defense & Interest - Sources

Conclusion

The typical complacent response is that the United States is far too powerful to be challenged, and there is no real substitute for the Dollar as global reserve currency or US Treasuries as global reserve asset. However, decades of economic mismanagement have eroded confidence in the Dollar as a store of value. Geopolitical blunders also squandered much of the advantage accumulated from the post-WWII Pax Americana.

The decline in American power over the past two decades is likely to seem gradual compared to its eventual collapse. Applying Hemingway’s Law of Motion, the change should come quickly once the tipping point is reached.

The Pax Romana lasted several centuries, but its decline was swift after Rome’s economic dominance crumbled. British dominance lasted from the end of the Napoleonic Wars in 1815 to the outbreak of the First World War in 1914. Britain’s navy still ruled the waves for another three decades, but its economic decline had already begun.

President-elect Trump has promised to reverse the US economic slide. Unfortunately, his chance of getting that right is closer to William Buckley1 than Lyndon Johnson or Richard Nixon.

Please note that this does not necessarily mean that the US central role in the global economy will be replaced by China, which faces its own set of challenges. What is more likely is a destabilizing vacuum, with rival states jostling for power and riding roughshod over their weaker neighbors. Ancient Greek historian Thucydides observed, in his History of the Peloponnesian War (c. 400 BC), on the conflict between Athens and Sparta:

The strong do what they will and the weak suffer what they must.

In times of uncertainty, demand for gold rises.

Acknowledgments

Notes

  1. In Australian vernacular, “Buckley’s chance” refers to William Buckley, who escaped from a convict ship in 1803 and was left presumed dead when the ship drew anchor and sailed onwards to Sydney. Thirty years later, Buckley turned up to greet the first ships arriving to settle the Port of Melbourne, having survived in the bush against improbable odds, supported by indigenous tribes.
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Weekly Stock Market Snapshot

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The above two dials provide a snapshot of our market view and attitude to risk.

Bull/Bear Market

The Bull/Bear Market indicator fell to 40% last Friday from 80% on November 9th.

The most recent bear signal is heavy truck sales, which plunged to a seasonally adjusted 32.5 thousand units in October 2024 from a peak of 46.1 thousand in May 2023.

Heavy Truck Sales

There are now three of five indicators signaling Risk-off:

Bull/Bear Market Indicator

Stock Pricing

The Stock Pricing indicator compares stock prices to long-term sales, earnings, and economic output to gauge market risk. We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile.

Stock pricing remains in the extreme range, at the 97.83 percentile compared to 97.67 last Friday, warning that stock prices have the potential for large drawdowns.

Stock Market Value Indicator

Conclusion

We are headed for a bear market, with our allocation to risk assets declining to 40%.

Stock pricing is also extreme, warning of the potential for large drawdowns.

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The last guardrail

In the above ABC interview, Professor Nouriel Roubini said it would be interesting to watch Trump deal with financial markets:

He said if Trump was “really serious” about 60 per cent tariffs on China, and 10 to 20 per cent tariffs on other trading partners, about sharply weakening the value of the US dollar, about “draconian restrictions” on migration and “mass deportation”, and about tax cuts that weren’t funded by raising other taxes or cutting spending, it could lead to situations Trump wouldn’t like.

“If he tries to follow these policies that are stagflationary, interest rates are going to be much higher, bond yields are going to be higher, the Fed will have to raise rates rather than cutting them, the stock market is going to correct,” he said.

“He cares about the bond market. He cares about the stock market. And therefore market discipline, as opposed to political discipline … [will] be the main constraint [for him].”

Long-term Treasury bonds continued their downtrend after November 5.

iShares 20+Year Treasury Bond ETF

Ten-year yields are testing resistance at 4.5%. A breakout above 4.5% would likely cause a correction in stocks.

10-Year Treasury Yield

Fears of rising inflation are not the only factor driving Treasury yields higher. Since 2020, Treasury issuance has been skewed towards short-dated T-bills, with the issuance of notes and bonds (green) kept as low as possible to suppress long-term yields.

Treasury Issuance

A study by Hudson Bay Capital concluded that rolling back the excess $1 trillion in T-bill issuance would cause a 50 basis point rise in the 10-year yield—equivalent to a 2.0% rise in the Fed funds rate—before settling at a permanent 30 basis point increase.

Also, Fed QE almost exclusively focused on purchasing notes and bonds to keep long-term yields as low as possible. Reducing the Fed’s balance sheet through QT increases the supply of notes and bonds, driving long-term yields higher.

Fed Holdings of Treasury Notes & Bonds and T-bills

Rising long-term yields constrain the S&P 500, which is testing support at 5850. Breach would signal a correction to 5700.

S&P 500

Financial Markets

Bitcoin remains above 90K, signaling strong liquidity in financial markets.

Bitcoin (BTC)

Dollar & Gold

The Dollar index retraced to test support at its rising trendline, but breakout above 107 remains a threat, offering a target of 115.

Dollar Index

Gold rallied off support at $2,550 per ounce. Penetration of the descending trendline at $2,650 would indicate a base forming.

Spot Gold

Silver similarly found support at $30 per ounce.

Spot Silver

Energy

Brent crude remains in a bear market, which is likely to keep inflation in check as long as global demand remains subdued.

Brent Crude

Base Metals

Copper also reflects weak global demand, with another likely test of support at $8,600 per tonne.

Copper

Conclusion

Donald Trump’s election campaign was based on reviving a “weak” economy, which has proved surprisingly resilient. The Fed and Treasury succeeded in taming inflation without crashing the economy—a rare feat. However, their efforts have built up imbalances in the financial system that lie in wait for the unwary.

Stimulating an economy already close to full employment will inevitably cause higher inflation, preceded by a surge in long-term Treasury yields. The result would be a sharp fall in stock prices and a likely recession.

The Republican party may control the House and the Senate, but the final guardrail is the bond market. They ignore that at their peril.

Gold and silver fell as the Dollar soared in response to higher long-term Treasury yields. But yields are rising in anticipation of rising inflation. We remain bullish on gold and retain our $3,000 per ounce target.

Acknowledgments

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Australian retail sales and building approvals

Seasonally adjusted retail sales grew by 0.5% in volume terms in the September quarter.

Australia: Retail Sales

The headline number, however, disguises the underlying stress consumers are experiencing. Per capita retail sales are falling steeply.

Australia: Retail Sales per Capita

The RBA is unlikely to act on this, however. Instead, it will focus on headline numbers like dwelling approvals, which have broken their recent downtrend.

Australia: Building Approvals

Conclusion

A November rate cut remains unlikely.

Acknowledgments

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GDP gradually slowing

Real GDP growth slowed slightly to 2.66% over the twelve months ending in Q3, compared to 3.04% for the previous quarter.

Real GDP Growth

Real quarterly growth is essentially unchanged at 0.70% (2.8% annualized) in Q3.

Nominal GDP & Real GDP, Quarterly

Nominal GDP growth (gray below) slowed to 4.94% for the four quarters ending in Q3. Ten-year Treasury yields are lower, indicating that monetary policy remains supportive.

Nominal GDP & 10-Year Treasury Yield

This is borne out by the Chicago Fed National Financial Conditions Index at a low -0.56.

Chicago Fed National Financial Conditions Index

Credit markets also signal strong liquidity, with Moody’s Baa corporate bond spread narrowing to 1.49%.

Moody's Baa Corporate Bond Spreads

Conclusion

Real GDP growth is slowing gradually, as expected during a rate-cut cycle. Financial market liquidity remains strong, and there is nothing particularly concerning.

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ASX 200 jumps to new high

A strong September jobs report boosted the ASX 200 to a new high of 8355, confirming our target of 8500 for this year.

Labor Market

The Australian economy added a seasonally adjusted 64,100 jobs in September, according to the latest Labour Report, well above expectations of 25,000.

Australia: Employment

The unemployment rate remained steady at 4.1%.

Australia: Unemployment

The surge in jobs was absorbed by an increase in the participation rate to a robust 67.2%.

Australia: Participation Rate

Aggregate hours worked also improved to 1,968 million in September, a 0.3% increase compared to the 0.2% average over the past 12 months.

Australia: Aggregate Hours Worked

Business

Strong labor conditions failed to inspire business confidence, with NAB business confidence (black below) declining to -6 pts in the third quarter.

NAB Business Confidence

Wage costs were the number#1 issue affecting business confidence:

Issues Affecting Business Confidence

The Mining industry (red below) recorded a sharp drop in confidence.

NAB Business Confidence by Industry

Stocks

The ASX 200 rallied through resistance at 8300, confirming our year-end target of 8500.

ASX 200 Index

The ASX 200 rally was led by a strong surge in Financials, which is headed for a test of resistance at 8600.

ASX 200 Financials Index

The ASX 300 Metals & Mining Index remains tentative, weighed down by falling demand from China. Breach of support at 5600 would warn of another test of long-term support at 5000.

ASX 300 Metals & Mining Index

On the other hand, the All Ordinaries Gold Index is testing its July 2020 high at 9500. Breakout would offer a long-term target of 14500. The soaring gold price and falling energy costs have boosted margins, with diesel a substantial cost in extraction and transportation.

All Ordinaries Gold Index

Conclusion

A strong jobs report boosted the ASX 200, which recorded a new high of 8355, confirming our target of 8500 for the year.

Strong employment growth suggests that the RBA is unlikely to cut interest rates before next year. Instead, the hawks will be keeping a beady eye on inflation.

Business confidence remains low, with Mining especially hard hit by sluggish demand from China.

The Financials sub-index is headed for a test of resistance at 8600. Breakout would offer a medium-term target of 9200. The All Ords Gold Index is also bullish, testing its 2020 high of 9500. Breakout would offer a long-term target of 14500. Metals & Mining, however, remain bearish.

Acknowledgments

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S&P 500 makes new high

Bond markets were closed Monday for Columbus Day, but financial market conditions show further signs of easing. Equities powered ahead, with the S&P 500 making a new high at 5859.

Stocks

The S&P 500 broke resistance at 5800, strengthening commitment to our target of 6000 by year-end. Rising Trend Index troughs signal long-term buying pressure.

S&P 500

The advance is broad, with the equal-weighted index ($IQX) breaking resistance at its previous high of 7300. This offers a target of 7500.

S&P 500 Equal-Weighted Index

Financial Markets

Moody’s Baa corporate bonds spread narrowed to 1.54%, signaling ready availability in credit markets.

Moody's Baa Corporate Bond Spreads
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Bitcoin also broke above its six-month trend channel, signaling strong liquidity in financial markets.

Bitcoin (BTC)

Dollar & Gold

The Dollar Index continues to strengthen as Treasury yields rise. This may seem counterintuitive, given the prospect of further rate cuts ahead, but the strong September jobs report has increased bond market concerns about an inflation recovery.

Dollar Index

Gold found support at $2,600 per ounce but has hesitated at $2,650. A lower Trend Index peak would warn of another test of support at $2,600. The Shanghai Gold Exchange no longer trades at a premium, with the iAu99.99 contract quoted at 605.04 RMB/gram, equivalent to $2,643 per ounce at the current exchange rate of 7.12 CNY to the Dollar.

Spot Gold

Silver is also hesitant, testing short-term support at $31 per ounce.

Spot Silver

Crude Oil

Brent crude is retracing to test support at $76 per barrel after Israel confirmed they would not strike Iranian oil targets and OPEC cut their oil demand forecast for 2024 and 2025.

Brent Crude

Brent [crude] fell 5%, or more than $4, in after-hours trading following a media report that Israeli Prime Minister Benjamin Netanyahu told the U.S. that Israel is willing to strike Iranian military targets and not nuclear or oil ones…..

OPEC on Monday cut its forecast for global oil demand growth in 2024 and also lowered its projection for next year, marking the producer group’s third consecutive downward revision. China, the world’s largest crude oil importer, accounted for the bulk of the 2024 downgrade as OPEC trimmed its growth forecast for the country to 580,000 barrels per day (bpd) from 650,000 bpd. China’s crude imports for the first nine months of the year fell nearly 3% from last year to 10.99 million bpd, data showed. Declining Chinese oil demand caused by the growing adoption of electric vehicles (EV), as well as slowing economic growth following the COVID-19 pandemic, has been a drag on global oil consumption and prices. (Reuters)

Base Metals

Copper is testing short-term support at $9,500 per tonne after it respected resistance at $9,900. Breach of support would offer a target of $9,250.

Copper

Aluminum similarly retreated from resistance at $2,650 per tonne and will likely test support at $2,500.

Aluminum

China’s deflationary pressures also worsened in September, according to official data released on Saturday. A press conference the same day left investors guessing about the overall size of a stimulus package to revive the fortunes of the world’s second-largest economy.

“The lack of a clear timeline and the absence of measures to address structural issues, such as weak consumption and reliance on infrastructure investments, have only increased ambiguity amongst market participants,” noted Mukesh Sahdev, the global head of commodity markets-oil at Rystad Energy. (Reuters)

Iron Ore

Iron ore is expected to retrace to test support at $100 per tonne following a sharp rise after China’s stimulus announcement.

Iron Ore

Conclusion

Financial markets show signs of a promising rise in liquidity, with falling corporate bond spreads and Bitcoin breakout above its six-month trend channel. The S&P 500 responded with breakout above 5800, strengthening our commitment to a target of 6000.

Gold and silver display strong uptrends but hesitate in response to a rising Dollar. Increased fears of an inflation rebound are behind the recent rally in long-term Treasury yields and the Dollar. We expect the uptrend in gold and silver to continue, with low real interest rates, whether or not inflation fears fade.

We expect that China will struggle to recover from its current economic slump. The announced stimulus program remains vague and does not address the underlying issue of weak domestic consumption. Deflationary pressures will likely keep a lid on crude oil and industrial metal prices for several years.

Low crude oil prices are also likely to keep inflation in check, leading to low long-term interest rates in the West.

Acknowledgments

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Stabilizing crude oil prices

Volatile crude oil prices damage production capacity and economic growth and cause volatile consumer price inflation.

At the height of the 2020 pandemic, Nymex WTI crude oil prices fell to an unprecedented low of -$13.10 per barrel as demand dried up and oil storage facilities reached capacity. Producers faced a dilemma: either shut down wells or sell at a loss, effectively paying end users to consume their oil.

Nymex WTI Crude

The Department of Energy failed to capitalize on this opportunity to replenish the Strategic Petroleum Reserve (SPR), buying only 21 million barrels of crude over four months. US field production fell from 13 million to below 10 million barrels per day as shale producers shut wells rather than produce at below cost. The damage done to balance sheets meant that it took several years to restore production as prices recovered.

US Crude Oil Production

Russia’s invasion of Ukraine in February 2022 caused a spike in crude oil prices, with WTI crude peaking at close to $125 per barrel. In response, the Biden administration released 290 million barrels from the SPR. This tipped the oil market into surplus despite OPEC+ production cuts, with Nymex crude prices falling below $75 per barrel.

Strategic Petroleum Reserve (SPR)

Shrinking demand from China and rising non-OPEC production, led by the US, has maintained prices at close to $75 per barrel. Now, hostilities between Israel and Iran threaten to escalate to the point that crude oil supplies from the Middle East could be affected.

Joseph Webster from the Atlantic Council argues that the DoE should not hesitate to make further releases from the SPR to stabilize prices in the event of a supply threat. Net crude imports to the US (blue below) have shrunk to 2 million barrels daily from 8 million in 2017, meaning the SPR provides more than 23 weeks of cover if all imports were to be terminated.

US Crude Net Imports

Further releases from the SPR would not only help to keep prices low but also stabilize them, which can be highly profitable for the US government. SPR releases under the Biden administration, at an average of close to $90 per barrel, will net about $20 per barrel if the SPR is replenished at current prices—a profit of nearly $600 million.

Conclusion

Releases from the Strategic Petroleum Reserve (SPR) should be used to stabilize crude oil prices in case of an interruption to crude oil imports. This would likely have four benefits:

First, SPR releases would ensure an interrupted supply to industry and minimize the impact on the economy.

Second, replenishing reserves when prices are low would help to maintain a floor under prices and support shale producers, avoiding the shut-down of wells when prices fall too low to cover operating costs.

Third, stabilizing energy prices can be achieved at no cost to the taxpayer. Selling when prices are high and buying when prices are low will likely show a profit.

Lastly, SPR releases would help to keep a lid on inflation. Energy prices impact the consumer price index directly through gasoline and heating prices to the consumer but more significantly through the energy cost component of goods and services. The chart below shows how energy CPI (orange) increased ahead of headline CPI in 2021 and similarly led the decrease in 2022-2023.

CPI & CPI Energy

Acknowledgments

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