Take a good long look…
Brent Crude Oil — Five Years
Soak it in.
Brent Crude Oil — 10 Years
Take a screenshot. Print that chart out, put it in a frame, and hang it on a wall.
Because you might want to remember this as one of the last times you ever saw oil prices below $100 per barrel.
Labor shortages, supply chain disruptions, tight production capacity, low inventories, increasing demand, and OPEC’s diminishing influence all contributed to moving the price of oil more than 50% higher in 2021.
It was the strongest year for oil prices (percentage-wise) since 2007.
Brent crude rallied well above its longer-term $50–$60 range to end 2021 at nearly $80 per barrel.
Now fresh geopolitical tensions between Russia and Ukraine and continued concerns over supplies have oil prices propelling toward $100. At last look, Brent crude for April delivery was trading at $90.91 per barrel.
Brent Crude Oil — Two Years
Almost every major investment bank is predicting oil prices to breach $100 this year.
Analysts at Goldman Sachs and Morgan Stanley are expecting oil prices to reach $100 later this year.
Meanwhile, Bank Of America sees crude at $120 by June.
Those at JP Morgan believe oil will hit $125 this year and continue to rise to $150 per barrel next year.
UBS analysts recently capitulated that oil will probably top $100 this year.
$100 oil might as well already be here, in the minds of analysts at least.
But what about the longer-term? Will we ever see oil back below $100 per barrel?
Unlikely.
Because there’s something most analysts seem to be discounting.
And that’s this…
U.S. Dollar Supply (M2SL)
That, my dear reader, is $6.2 TRILLION dollars created by the Federal Reserve in response to the COVID-19 pandemic in the past 24 months.
Where do you think the government got money for the billions sent out in stimulus checks? Where do you think it got the money to pay the drug companies for vaccines? Or for COVID tests? Or for marketing to encourage wearing face masks? Where do you think it got the money for the trillions of dollars in corporate handouts? (I’m sorry, I meant “forgivable loans.”)
Where did it get the money for all that?
The money for all that wasn’t just sitting around in a bank. If the government had that kind of money parked somewhere, and it wasn’t for something, the people would be outraged.
It created it.
And in just two years the supply of U.S. dollars has increased by over 40%.
Let me repeat that…
The supply of U.S. dollars has increased by more than 40% in the past 24 months alone!
$6.2 TRILLION dollars!
Consider this… The entire supply of U.S. dollars wasn’t $6.2 trillion until 2004!
It took 91 years, between the creation of the Federal Reserve and 2004, for the total supply of U.S. dollars to reach $6.2 trillion.
The Federal Reserve just printed that in 24 months.
What we’re talking about is nothing less than the largest expansion to the USD supply ever!
There is absolutely no doubt that all this new money will create long-term inflationary pressures. Already we’re seeing these inflationary pressures, particularly in oil and food prices. But I assure you, there is much more inflation to come.
You see, even though the Federal Reserve printed all this money, a lot of it still isn’t being exchanged. That means there are a lot of U.S. dollars out there in the world that aren’t being used to bid up the price of goods and services… yet.
The measure of the frequency at which a currency is domestically exchanged within a given time period is called the velocity of money. Since the COVID-19 pandemic began, the velocity of money in the U.S. has absolutely plummeted. And the velocity of the USD is still sitting at multi-decade lows.
Again, this means that even though the Federal Reserve printed all this money, a lot of it still isn’t being exchanged — it’s not being used to bid up the price of goods and services.
But sooner or later it will be.
No one holds cash as a hobby. They hold cash to eventually use or pass on for someone else to use.
And, of course, you might be wondering where all this money is sitting. Well, a lot of it is sitting here…
NASDAQ — Two Years
And here…
S&P 500 — Two Years
And here…
Dow Jones — Two Years
There’s even a whole lot sitting here…
Bitcoin — Two Years
But for how long?
Again, no one holds stocks or investment assets as collectibles. Everyone who buys a stock is hoping to sell it one day at a higher price. And sooner or later the market’s equity rally will end.
And that’s just the beginning…
A lot of the money recently created was sent overseas in the form of foreign aid. According to OECD, the United States was the top contributor to international aid at a time when foreign aid lifted to an all-time high.
All of that money sent overseas will sooner or later land back in America.
When all this money does come flooding back into the market (when the velocity of the USD picks back up) it’s all going to be used to bid up the price of goods and services to a much greater degree than we’ve experienced to date.
The consumer price index climbed 7% in 2021. That was the biggest 12-month gain since 1982. But that’s nothing compared to what I believe we’ll see in 2022. I expect inflation to reach all-time highs, with the CPI climbing at least another 10% over the next year due to all this fresh cash that will soon be flooding the market.
After that, I think we can pretty much say goodbye to double-digit oil.
Oil prices first breached the $100 level in 2008, amid concerns of dwindling supplies before new fracking technologies dampened prices.
But then, between about 2011 and 2015, crude oil traded above and around $100 per barrel.
Why?
Because the Federal Reserve printed a bunch of new money a few years prior to pay for bailouts stemming from the 2008 Great Recession.
How much did it print?
Between December 2007 and August 2011, the Federal Reserve added about $2 trillion to the money supply. At the time, it was a 27% increase in USD supply.
U.S. Dollars Created to Address
2008 Great Recession: $2 Trillion (27% Increase)
Now, again remember…
In the past 24 months alone, the Federal Reserve has added $6.2 trillion for a +40% increase to money supply.
U.S. Dollars Created to Address
COVID-19: $6.2 Trillion (40% Increase)
And that’s $6.2 trillion to date! There’s no telling what Biden will ask for next.
Not only is there little doubt oil prices will reach $100 per barrel this year, it’s likely this is one of the last times we’ll ever see oil under $100.
All the money Fed just printed is not going to simply disappear. It’s here to stay. And it’s yet to have a whopping effect on oil, food prices, and everything else we buy.
Brace yourself, dear reader. The worst for rising prices is yet to come.
