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Andreas Zanin
Analysis | July 6, 2021

KTM Commodity Weekly: No Naps for the Brent

Brent crude oil outperformed the energy space in June with 7.90% gains. Finally, the most eye-popping factor is the price closed above the 200MA on the monthly chart for the 1st time since April 2018.

As the COVID crisis is easing out, the oil demand is heating the nozzle-so do the core inflation. Core inflation excludes fuel and food items from the headline inflation number. Hence core is less volatile than the headline.

In general, higher oil prices have a strong correlation to the producer price index (PPI).

  • “The correlation between oil prices and the PPI is 0.71. This strong link likely comes from the importance of oil as an input in the production of goods,” according to Fred.

The May PPI number came at 0.8% vs. 0.6% in April and 1% in March as per BLS. “Nearly 60 percent of the May increase in the index for final demand can be traced to a 1.5-percent rise in prices for final demand goods,” the US Bureau of Labor Statistics reported on 15 June.

Moving away from the US perspective and panning to the Russian Ruble, the Russian currency strengthens 12% against the dollar from March 2020 low. But the Ruble is still depreciated 50% since the 2015 impulse rally. A weaker Ruble means higher profits to Russian oil companies.

  • Oil prices affect both headline and core inflation rates because although the oil price has a lower weighting than in the past, it is a volatile component at a time when most prices are low and stable—making oil prices stand out, UBS reported.

Where is marching now? As we noted last week, we are climbing gradually towards $78.50-$80 levels initially, followed by $86-$88 and hypothetically $100-$104.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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