Given the newly found love affair between oil prices and bond yields, it is self-evident, almost axiomatic, that borrowing is becoming ever more expensive. Although US Treasury yields pulled back from recent highs after decent demand at the latest 30-year bond auction, fears of inflationary pressure and competition between sovereign and corporate debt will likely keep borrowing costs elevated.
The bond market remains ruptured as even the gods of Wall Street are held ransom to the permalink between the fortunes of oil and the state of future interest rates. As oil prices traverse a piste of moguls that one day show diplomatic breakthrough, the next threats of further military action and/or concentration sometimes centring on feedstock being increasingly available from the Middle East only to flip back to the paucity of global refined fuel inventory, they cement the inverse correlation between oil and bonds.
Numbers do not lie. Well, usually they don’t. If you add two to two, you get four. If the price of a medication costing $100 is cut by 600%, the patient will get paid $500 for the prescription. If 5.8 million bbls of crude oil have been pumped through the East-West pipeline, as estimated by Aramco’s CEO, or 12 mbpd of crude oil and 2 mbpd of products are transiting the Middle East, according to the boss of Vitol, the oil balance changes materially.
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