Cooling

High-fiving by the water coolers in the Eccles building may have a little more oomph, a little more follow-through, perhaps even, a bit more up through the thighs: SMACK! And grins all round. The reason, is that there appears to be a growing sense of the FED’s grand plan coming together, inflation is almost tamed, the much doubted soft landing is in sight. See Walmart cutting pay for new starters for, umm, starters. Indeed, recent data points to further evidence of the sort of easing the policy makers want to see: job openings – down, participation – up. All good. Gauging the state of the nation’s labour market is notoriously a bit wet-finger-in-the-air, and the data is prone to several revisions, but as it stands, per the WSJ, there is now a ‘Shift seen in the Fed officials rate stance’. No longer up, more let’s wait and see. No more rate hikes is good news for everyone, hence a little more post-holiday vim all round. That said, deeper into the WSJ there’s a report on how those drilling for oil and gas in the shales are struggling. Fields are maturing. Growth is falling. Since the ending of the one-off liquidation of various strategic petroleum reserves, the prices of crude has rallied. There’s a thing. Whilst the price has been up and down, and the narrative been one of recession, commercial inventories have remained tight over the past 12 months. And consumption is robust. One of the key long-term considerations for demand, which even the IEA seem to miss, is that 17% of the world’s population gobble up 170GJ per person of primary energy. The rest – which is about 7 billion people – use just 60GJ. And every year millions and millions more people start gobbling up more primary energy, moving from emerging market to lower-middle income energy consumers. And will continue to do so for years to come, irrespective of what the G20 say. With demand going up then, supply needs to keep pace. But it isn’t. As per the WSJ article, the shales are getting drilled out. Outside the Permian, production has not grown in three years, and even the massive Permian Basin whilst still growing is expected to plateau next year, and then start falling. The only source of non-OPEC growth is tapping out. No wonder the Saudis are more confident at extending their production cuts, no longer fearing, perhaps, the loss of market share. That and perhaps not having as much in reserve as many people think; but that’s a separate issue. With the Northern hemisphere winter looming there’s a quiet thud-thud-thud of an inflationary pulse that can be heard across the energy complex from crude oil to natural gas. Those smiles in the corridors of the Eccles building may yet fade.