HomeHigher Oil Prices Fueling Inflation Expectations

Higher Oil Prices Fueling Inflation Expectations

The WTI crude oil price reached $70 this week –  a stunning development since only about a year ago it settled below $0. Higher oil prices lead to increased inflation expectations – how high can oil go?

The WTI crude oil price is on “fire”. For the entire year so far, it traded with a bullish tone only. Technical traders refer to a bullish trend as a series of higher highs and higher lows.

Effectively, it means that the market corrects, but not deep enough to break the previous lower high. And then, it bounces and reaches a new higher high. Rinse and repeat, and this is what happened to the price of oil in 2021.

When it reached $60, it met strong horizontal resistance. Only that the market kept bouncing back to resistance, eventually breaking it. This is what technicians refer to as an ascending triangle.

Its measured move? $76.

Oil Price – Key Inflation Driver

Yesterday, the US inflation data for the month of May was released. Just like in April, the actual inflation numbers exceeded expectations, on both the headline and the core releases.

The core CPI inflation, which excludes energy and food prices, rose to 3.8% on an annualised basis – the highest print since 1992. That is a level that would probably matter for the Fed at next Wednesday’s meeting, and most of it is due to the combination of loose monetary and fiscal conditions, combined with higher oil prices.

Risks to Higher Oil Prices

One interesting take is that central bankers in the developed world expect inflation to be transitory. One of the explanations for it is that energy prices (i.e. oil prices) will moderate.

What if they didn’t? What are the risks for the current oil prices?

The most important one is the Iran deal. A nuclear deal with Iran will likely involve a lifting of the oil sanctions, bringing to the market millions of barrels of additional oil supply. As such, the price of oil may moderate, but for now it remains bid, close to 2021 highs.

If the technical analysis scenario works out, a move above $76 should not surprise anyone, considering the dynamics in the oil market and the ongoing COVID-19 economic recovery. The big question is – what happens then?

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