Perhaps, as non-financial types, you have been perplexed by the strange doings of the various markets. Well, you should be. Consider these statistics for the year to date (May 21):
The US stock market, as represented by the S&P 500 has declined by 0.6 %.
WTI oil price has fallen 14.5%.
The US dollar dropped 8.2%.
US Treasury bond yields rose 2 basis points (meaning bond prices fell 0.4%).
Real GDP in first quarter of 2025 declined 0.3%
Let’s start with the oil price. At the beginning of the year, we argued that oil prices, over the long term, moved with the rate of inflation and at the end of last year, the real oil price was right where we would expect it to be, based on the trend line. Obviously, since the end of the year, oil prices fell well below the trend line. Given that oil is quoted in dollars, and the dollar has fallen sharply, the decline in oil price is a lot worse than it looks.
What accounts for the decline? Maybe the market anticipates more production from Saudi Arabia, or the lifting of sanctions on Iran or Russia, or discovery of a new mega field somewhere. (Keep in mind that Saudi Aramco just slashed its dividend, not exactly a portent of good times ahead.) But maybe the price just signifies an adjustment to poorer economic conditions and less demand due to an already slowing economy now perturbed by the tariff wars. The US GDP number for the first quarter is not indicative, due to pre-tariff inventory building, but consumer confidence numbers have fallen, and so have economic projections.
The stock market has not been strong, but neither has the bond market, which is peculiar because they generally go in opposite directions. (Equity investors tend to like inflation because it often goes with accelerating earnings. Bond investors, owning fixed streams of payments, are hurt by inflation.) The falling value of the dollar plus the rise in Treasury interest rates might indicate less foreign confidence in US markets. Generally, during periods of economic turmoil, foreign investors seek safety in US dollar investments. The Federal Reserve has two principal duties, set by Congress, to control inflation and to encourage full employment. It is not often that it faces the possibility of rising prices and a slowing economy. So what happens if higher tariffs raise prices and depress economic activity, as seems likely? Should the Fed raise interest rates to control inflation (and thereby accelerate the economic slowdown) or lower rates to boost the economy as the President is urging (but promote inflation). Confused? That means that you see the picture.
None of this economic uncertainty bodes well for the oil business short term. What is our conclusion? Basically, this: the drill-baby-drill boom probably has ended. Leave the oil in the ground for now. It won’t go away.
