I had to rub my eyes for a moment yesterday when I saw that the price of U.S. natural gas had surged to $7.50 per million BTUs. Nah…must be a different contract or something, was my first reaction. Must be a quirk. Maybe there was some kind of pipeline problem or weird cold snap or outage. Nat gas always trades around $3 or $4, maaaybe $5. It doesn’t go that high.
Oh but yes, it does go that high. And higher–by noon, we had crossed above $8. I asked Toby Rice, the CEO of EQT, the biggest natural gas producer, what was going on. “Why are prices surging now?” I asked. “Isn’t this a seasonally weak period?” Yes, he answered, it usually is. But a confluence of factors, from Russia’s war on Ukraine to the actual cold snap that is going on right now, has conspired to suddenly push the price dramatically higher.
This is bad news for end users if it doesn’t reverse quickly; natural gas powers more than half the electricity grid in hot southern states like Texas and Florida that are soon entering peak air-conditioning season. It will be even worse news if prices remain stubbornly high by next autumn, as winter approaches and roughly half the population–not to mention schools and businesses–relies on natural-gas heat.
And it’s not just the natural gas price that is surging. Have you seen the price of oil? It got back yesterday to basically where it was at the end of last month, before the Biden administration announced the massive release of barrels from the Strategic Petroleum Reserve. This on signs that China is allowing more of Shanghai to slowly reopen. The massive city’s lockdowns have helped remove a key source of demand on global oil supplies, and its reopening means that upward pressure is gradually returning.
And it doesn’t end there. Food prices are back on the rise, too. Corn is about to hit record highs, having yesterday closed at the highest since a nasty drought in 2012. Corn prices are up 35% just since January; wheat prices are up 46%, soybeans are up 28%, cotton is up 27%, even orange juice is up 36% in that time. And now rice, only up 11% so far this year, has also been starting to play catch-up; with its recent rally, rice prices are now up 65% compared with five years ago.
So we can talk about drought conditions, the war on Ukraine, the pandemic, the supply chain, the trucking shortages, the labor shortages, etc., etc., but that’s exactly the point–it’s a “lollapalooza” effect, as Munger likes to call it, that’s taking place here. And all of these supply-side issues are just exacerbating the real cause of this commodities “super-cycle,” which is a huge structural increase in global demand.
Goldman’s Jeff Currie has been talking about this for a year now. As he explained, the global policy response to the pandemic unleashed a structural increase in demand, and that is why we’re seeing these inflationary pressures everywhere. “Only the world’s low-income groups can create inflation and commodity bull markets,” he said. “What do the world’s rich control? Dollars. Can they create GDP? Yes. But can they create physical goods inflation? Numerically impossible. There’s not enough of them.”
Two more observations to add here. For one, this is obviously not how commodity prices behave if we’re going into recession. Last cycle, when the Fed’s tightening truly triggered downturn concerns, you’d see immediate selloffs in demand-sensitive commodities like oil and copper. That’s definitely not happening right now–in fact, these prices keep moving higher. The market is not sending “Fed policy mistake” signals about their sudden hawkishness lately. At all. It’s almost completely shrugging it off.
And that’s because, number two, not only are commodity prices not collapsing, but inflationary pressures are now broadening out across the services arena. Which is even worse, because that’s a much larger part of household budgets and the economy. “I just found out my kids’ swim lessons are going up 8% this year,” my producer mentioned the other day. Yep. “The data show an inflation process that is actually broadening out, not retreating,” wrote MKM’s Michael Darda in response to the CPI report last week.
“Policy has been, and remains, too loose,” Darda wrote. “Those predicting a crash in inflation…are likely to have their expectations dashed once again.” Households haven’t even returned to their pre-pandemic level of spending on services, he warned; as they do, that will put even more upward pressure on prices, and exacerbate the labor shortages at the heart of the problem. “These pressures are likely to intensify as a super-tight labor market collides with reopening and a deep pool of spendable deposits,” he cautioned.
I don’t like where this is all going. The public–which is supposed to be helped by the stimulus and tight labor market–doesn’t seem thrilled, either. The president’s job approval on the economy was recently at -30, with voters vastly preferring Biden focus on inflation versus the war in Ukraine. Politico reports that “the hot-button issue of inflation has become central to the midterms.” And as Dan Clifton remarked on our show the other day; “This is my twenty-sixth year of working in policy, and I’ve never seen an issue this lopsided. Voters want Washington to deal with inflation.”
Point being, any policy makers hoping this problem would “go away on its own” should by now be realizing it definitely won’t.
See you at 1 p.m!