The World Is A Powder Keg. When Will The Price of Oil Reflect This Reality? Yields Are Going Higher.
The price of oil is a bit of a mystery. A recession is on the horizon, yet the Biden Administration is fighting a proxy war with Russia, is positioning itself to fight a proxy war with Iran (if not a direct war with Iran) and talks of defending Taiwan should China move on the island. If this geopolitical risk is not enough to cause indigestion, I’m not sure what is. Add the United States’ fiscal insolvency to the stew and it’s enough to cause a bleeding ulcer – or at least drive the price of oil and yields higher.
Will the price of oil exceed $95 this week? I would have guessed that oil would have been north of $95 per barrel by now. Do commodity traders need to see full nuclear conflict before the price of oil moves above $90? The probability of nuclear conflict is not zero percent. There is a religious war taking place in the Gaza strip. This is not a political conflict. Assuming that the Israel Hamas war will remain contained is a risky assumption. Western Europe is a soft target and the U.S. with its open southern border is the softest target of all.
5% , 6%, 7%? With respect to the 10-year Treasury yield, ongoing Treasury auctions combined with the geopolitical risk mentioned above in conjunction with the United States’ fiscal insolvency is more than enough to drive the 10-year Treasury yield well above 5%. We could see a 5%-plus yield today. A 6% yield could be around the corner. 100 basis points feels like a lot today, but we could see yields move sharply under the right set of circumstances such as the escalation of war and/or an acceleration in price inflation.