The US markets rounded out September by snapping the 7-month winning streak for US stocks. After having a strong August, up 3% for the S&P 500, we finished September down -4.7% (month-over-month). September was also full of sensational headline news around the looming debt ceiling, the Evergrande debacle, and the global energy crunch and rising oil prices. Also, a lot of current headlines contain the word ‘stagflation,’ but what is stagflation?
What is Stagflation?
In simplest terms, stagflation references an economic condition experienced when inflation runs hot and unemployment remains high. Potential factors contributing to the stagflation narrative include:
- Delta variant concerns pushing consumers towards goods, particularly home-related items, rather than services.
- Strong demand for these goods has been met with supply chain bottlenecks. Issues on the production side include workers being sidelined by childcare, health and lifestyle concerns. Not to mention potential employees leaving the workforce altogether. Some foreign factories implement a zero-tolerance approach, going as far as completely closing down production over reported positive cases in workers.
- Raising oil & energy prices is likely to exacerbate inflation.
Why Are Oil Prices Rising?
There are likely multiple drivers of the increasing cost of oil. We layout a list of a number of possible factors:
- Oil Storage and demand: Global crude inventories have decreased to their lowest levels post-pandemic, due in part to the reopening and returning demand as delta variant concerns subside.
- Weather-related issues: Hurricane Ida took a good portion of supply out of the U.S crude market, approximately 17mm barrels1.
- OPEC+ Production: Even after Biden requested increased output from foreign producers, OPEC remains committed to its scheduled, gradual output increases.
- Natural Gas: Prices for natural gas have seen a dramatic increase this year, nearly increasing 120%. This increase in cost has driven some nat gas users to switch to oil and coal as a substitute.
Most economists would agree that the cure for high prices is high prices. Producers will seek to profit from rising prices by increasing output. The increased output will eventually lead to higher supply which in turn reduces prices. However supply-chain issues can slow down the ability of producers to increase output. Once these supply chain issues can be worked out of the system, the economy will be able to properly respond to increasing demand.