Oil is more than a commodity, it’s ‘a financial asset’: Strategist
Oil prices (CL=F, BZ=F) continue their upward trajectory, with Brent Crude surpassing $86 per barrel. R.J. O’Brien Managing Director Tom Fitzpatrick joins Yahoo Finance Live to discuss the ongoing rally in oil prices.
Fitzpatrick notes that oil should not only be viewed as an “industrial commodity” but also as “a financial asset.” The strategist emphasizes that oil prices do not solely trade based on supply and demand dynamics: the rally’s movements have been “very technical” in nature.
Addressing the geopolitical tensions driving oil prices higher, Fitzpatrick believes the price moves highlight “what we are susceptible to.” He notes that the way price action is already trading, another significant event could “accelerate [oil prices] to the topside.” However, current events do not “rise to the significance” of 2022’s oil disruption amid the Russia-Ukraine War, Fitzpatrick says.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor’s note: This article was written by Angel Smith
Video Transcript
SEANA SMITH: Well oil prices like Julie was just saying climbing once again. Today you’ve got Brent briefly surpassing 86 bucks for the first time that we’ve seen that level since November. And you also have crude surpassing 80 just above 81 bucks a barrel. Prices for Brent and crude swinging to the upside over the last week. This comes as Ukraine steps up its attacks on Russian energy infrastructure.
We have seen this steady March higher though for quite some time. So we want to bring in Tom Fitzpatrick. He is RJ O’Brien’s global market insights managing director. RJ, it’s great to have you here. So we’ve seen this March to the upside ahead of CERAWeek. There is certainly a lot of focus on energy on transition on M&A, a number of the top themes that our colleague Julie Hyman was just talking about playing out within the energy space.
Talk to us just about this move higher that we’ve seen in prices and what that tells us about what’s likely to come within the space?
TOM FITZPATRICK: Thanks very much and thanks for having me. I think in terms of this move higher, one of the things we should always remember is that oil is an industrial commodity but it’s also to a certain extent, a financial asset. And how it trades is not always a function totally of the supply and demand dynamics out in the economy. The classic example of that being 2007, 2008 when the oil price tripled in price.
But you certainly couldn’t validate that there was a demand backdrop, which actually created that. So this move certainly, initially is very technical. We completed a bullish outside week on oil last week. And in fact on WTI, that’s the second one in the last three weeks. But outside of that, you haven’t seen this development since April of 2022. And when we got that in April 2022, oil ended up going significantly higher in the following eight weeks.
And we also posted this bullish outside week in Brent crude last week, which is the first one that we’ve actually seen on that since April 2022. So big technical developments and breaking out of the three month trading range and the weekly reversals suggest that we can continue to push higher. We have some good levels around 8350 on WTI and 89 on Brent. But if we get through those levels, then there could be a real danger that we could be pushing even further to topside towards 95 to 97.
And think what’s going to be very important is figuring out the ultimate reasonings for this because the feedback loop depending on that can be very different.
BRAD SMITH: Yeah. Tom, I mean, we think back to April 2022. And remember what was happening that also influenced some of the price action there. It was geopolitical conflict. It was Russia Ukraine. Are we just one exogenous event away from seeing another massive spike in oil?
It’s a valid point. But I mean, who knows what tail risks are out there. But sometimes price action tells you what we are susceptible to. And if there was a new event that would certainly suggest that given the way price action is already trading that the up move could accelerate to the top side. But with outside those events, I think we’d have to look at this and say that this doesn’t necessarily indicate we’d see a move of that magnitude. And this doesn’t come off the low of the trend either.
So it’s not as an aggressive reversal as we would have seen then when oil was already moving down. Whereas we’ve already moved up about 20%. So it is important if we do get another event. But I would suggest that this dynamic that we’re seeing at the moment is very much absent that event. And while it’s been a good push of about 20% since December, it doesn’t yet rise to the significance of what we saw back in 2022.
SEANA SMITH: Tom when we take a look at a lot of the M&A activity in the fourth quarter of 2023, record $144 billion worth of deals were signed for energy producers that was according to the latest data here from inverse. What does that tell us just about the setup then for 2024 and whether or not we could expect a further uptick in deals within the space.
I mean, at the end of the day at a minimum, what it tells you is that fossil fuels are not dead, the transition in terms of fossil fuels to alternative forms of energy, certainly been a main focus. But that takes time. That takes investment. And in a global economy where a lot of countries are already very stretched in terms of their fiscal position, you’re already seeing a scenario where that may take a transition period longer than people had previously thought.
So as a consequence, you’re sitting at an oil price that’s back to where it was a year ago. You’re sitting in an oil price that from an historic perspective, no it’s not at the 2008 highs or not even at the highs, we saw after the Russian invasion of Ukraine. But at 80, 85, 90, $95. It’s certainly at very elevated levels compared to what we’ve seen on a multitude of occasions in the last 10 to 15 years.
And as I guess as a backdrop when people look at that. They look at the geopolitical tensions that Brad has talked about. They look at the underlying dynamic of the overall economy where we’re probably producing as much as we can potentially produce. And they see where the oil price is. That feedback loop probably suggests to them that seems to be a very resilient commodity and therefore an area on that basis that’s probably worth continuing to look at from an investment perspective.
BRAD SMITH: To what extent do you expect what we’re monitoring within the oil market and Brent crude. Even for the assets and review over at BlackRock at the top end of their 2024 range at this juncture to what extent does this all pass into the Fed and what they’re going to be discussing this weekend and moving forward?
TOM FITZPATRICK: I think that’s a hugely interesting topic because often people look at the oil price and they think oil price up. That’s interest rates up. Oil price down, interest rates down. Inflation, disinflation. What’s much more important and I think particularly for policymakers is to identify why the oil price is doing what it’s doing. If you go back to 2022, when oil prices surged.
Let’s not forget that oil prices were surging at the same time as we had the biggest fiscal and monetary stimulus in the history of mankind. At the same time when employment was picking up quite dramatically and the savings rate was growing exponentially due to that fiscal stimulus. So the economy was recovering, the amount of money and free money in the economy was abundant.
And therefore rising oil price was not really a drag. But fast forward to today if you do not believe that this oil price move is a function of some significant pick up in economic activity. And I would suggest looking at China, Japan, Europe out on the borders of Ossetian. US real growth high but nominal growth falling. It doesn’t look like a very demand driven move. And therefore it’s no different from a tax hike.
And you would not raise interest rates or you would not get more aggressive in terms of your monetary policy if prices were pushing higher because of a tax hike. So sure it has a danger of showing up in headline inflation. But with unemployment rising with the savings rate lower, with salary increases moderating. What it feels like a lot of people tapped out, this is far more likely to result in a substitution effect we already see very weak retail sales coming through.
And an underlying drag on the economy. So we’ve seen the ECB plenty of times in the past make the mistake of reacting to dynamics that were only due to a non demand driven move in the oil price. I don’t think we will see the Fed do that. I think they will be looking through that dynamic because if anything this has the potential to be disinflationary at the core.
If it means that spending, which is not really discretionary in terms of oil, takes away from the ability for people to spend and at a time when mortgage rates are close to 7% and interest rates are much higher. So I think the Fed needs to be prepared to back from this and not be looking at this as something they should be reacting to at this point.
BRAD SMITH: Tom really great insights and analysis. Thanks so much for taking the time to have the conversation with us today. Tom Fitzpatrick, Andre O’Brien global market insights managing director. Appreciate it.
