After a couple of months of subdued shipping activity, Andreas Steno of Steno Research reports renewed pressure on freight rates. As global trade patterns normalize, seasonal increases in shipping volumes are creating upward pressure on freight costs, particularly along key trade routes between Shanghai and Europe. These routes are currently 50% above pre-conflict levels, significantly impacting global supply chains and goods pricing.
The latest German Ifo index data reflects rising price expectations driven by these increased freight costs. Steno also notes the resurgence of inflationary pressures.
Although disinflationary forces dominated markets in recent weeks, persistent supply chain disruptions, geopolitical conflicts, and expansionary fiscal policies continue to ignite pockets of inflation. Cumulative inflationary factors, analyzed via a z-score, still suggest potential for higher year-on-year inflation, particularly due to rising energy and freight costs.
Steno anticipates that the lagging effects of increased transportation and energy costs will soon reaccelerate U.S. goods inflation. These expectations underscore the importance of maintaining energy positions in portfolios, as inflation from these sources remains significant.
Meanwhile, Saudi Aramco, the state-owned oil giant, has raised the official selling price of Arab Light crude for June. This increase heightens the premium over local and international benchmarks, signaling a deliberate strategy to maintain a tight oil market. Despite diplomatic efforts from the Biden administration to stabilize supply, Saudi Arabia seems resolute in its intent to keep the market constrained. Analyst Andreas Steno says, "The Saudis will keep the market tight unless a deal is struck with the U.S.," which is improbable due to ongoing tensions in Gaza.
OPEC+ production output remains limited compared to forward-looking manufacturing indicators. The April figures did not meet expectations, tempering the anticipated manufacturing rebound.
However, improved financial conditions, favorable orders-to-inventory ratios, and positive economic indicators in rate-sensitive economies like Korea and Sweden signal continued recovery in manufacturing.
Saudi Arabia may consider convening another meeting with oil-producing nations to restore cooperation, which has waned in recent months.
Steno believes Saudi Arabia has previously succeeded in aligning Arab producers and could potentially reestablish cohesion within OPEC+ to manage market dynamics.
Rising freight rates and Saudi Arabia's strategic oil pricing signal mounting inflationary pressures, particularly in energy. Andreas Steno's analysis anticipates a potential acceleration in U.S. inflation as energy and transportation costs ripple through the economy. Given these factors, maintaining a portfolio position in energy is prudent as Saudi Arabia tightens supply, anticipating a new oil bull market.