Why we’re headed back to pre-Iran war oil prices and what it means
Jim Cramer predicted Tuesday that U.S. oil could soon return to pre-Iran war prices as crude falls to three-month lows. The continued decline in oil prices will have a positive impact on the economy. “We’re not going to go to $77, I think we’re going to go below $70,” Jim said on CNBC’s “Squawk on the Street.” When pressed about the timing, Cramer replied: “A month.” West Texas Intermediate crude oil, the American oil standard, fell sharply again on Tuesday, falling below $76. WTI extended Monday’s nearly 5% decline after the United States and Iran reached a memorandum of understanding to end their conflict. The deal is expected to reopen the Strait of Hormuz next Friday, easing concerns about disruptions to one of the world’s most important oil shipping routes. @CL.1 YTD mountain WTI crude oil YTD WTI closed around $67 on Friday, February 27, one day before the start of the Iran war. It rose higher and hit over $71 on its first day of trading on Monday, March 2. A week later, it briefly rose above $119, reaching a four-year high. WTI quickly pulled back from these extreme levels but remained elevated for months. Following the declines last Thursday and Friday, WTI’s war premium decreased to around 13.4% as the hope for a solution in Iran decreased repeatedly. Crude oil sales reflect a supply picture that is changing faster than many investors expected, Cramer said. Manufacturers around the world have increased production as prices have risen, and Cramer doesn’t expect them to reverse course immediately. “This collapse in oil shows me that the main thing that happened was that no one was really ready for this,” he said. “People were pumping like crazy. … I think there’s going to be a surprising amount of oil coming into the market that no one thought would come.” Their impact extends far beyond the energy market. The rise in oil prices played an important role in the warmer than expected May inflation reports. Consumer prices rose 0.5% for the month, while wholesale inflation rose 1.1%. Core measures of inflation, which exclude volatile food and energy prices, were significantly weaker; This suggests that the recent acceleration is largely due to the sudden rise in crude oil in the wake of the Iran conflict. The continued decline in oil prices could help reverse this trend, as lower energy costs tend to trickle into the economy by reducing spending on gasoline, transportation and manufacturing. This dynamic will make new Federal Reserve Chairman Kevin Warsh’s job a little easier. This week he chairs his first meeting as Fed chairman. The two-day June meeting will end Wednesday afternoon. While it is widely expected that the central bank will leave interest rates unchanged, the continued decline in oil prices will strengthen the possibility that inflation will decline on its own, reducing the need for policymakers to consider interest rate hikes. President Donald Trump has made no secret of his desire for lower interest rates and has criticized Warsh’s predecessor, Jerome Powell, for not cutting rates more aggressively. However, the conversation moved from possible interest rate cuts to possible interest rate increases as oil prices rose due to the war. If the war does indeed end and oil continues to fall, Warsh may have some breathing room for future rate cuts. On Monday, CNBC Senior Economics Writer Matt Peterson reported that his sources say Trump trusts Warsh more than Powell and will give Warsh more room to pursue changes at the Fed over time, including lower rates, a smaller Fed balance sheet and an overhaul of how the central bank measures inflation.
