American inflation rates tells OPEC when to cut production

Here is a lovely chart showing the price of WTI Crude and U.S. 5 year break-even inflation rate.

To which about the latter, the St. Louis Fed says, ‘the value implies what market participants expect inflation to be in the next 5 years, on average.’

They dance wonderfully together.

The better part of the chart is the lower bit where the RSI (Overbought/Oversold) indicator appears.

Whenever the 5 year breakeven inflation rate is Oversold (as this weekly chart shows), the WTI Crude Oil price finds a floor from which to advance.

We saw an Oversold 5 year b/e rate last week.

This week’s OPEC production cut announcement wasn’t a surprise because this Oversold moment tends to coincide with when OPEC announces production cuts.

Of course, Biden isn’t happy that OPEC have cut production.

Also, he has virtually spent all of the nation’s Special Petroleum Reserves in thinking it was him sending Gasoline prices lower, when it was in fact a combination of other falling commodity prices (which is deflationary), mean reversion in the oil price and rising credit forces at work.

No to mention the importance of Biden needing lower domestic petroleum prices to aide his mid-term election hopes.

OPEC’s production cut may seem to be mathematically synchronised to the United State’s own inflation break-even rates but I think it is equally loaded with a little political payback.

Funnily, the U.S. isn’t pleased with this announcement and have passed on their viewsbut you can’t have a say in a club to which you are not a member of.

Keep in mind, this doesn’t show you when to sell your Oil.

Those are other indicators.

October 6, 2022

by Rob Zdravevski

rob@karriasset.com.au