The New Normal

Risk level: Orange

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)


-This is neither normal nor good

-What is “oil”?

The price for Brent crude oil brushed up against the psychological threshold of $50 per barrel last week, a surprise run given the prospects of more barrels on the water from the producers under the OPEC+ umbrella. Equities and commodities are rallying on the prospects of vaccines for COVID-19, placing bets on late first quarter 2021 rather than the dismal economy in the here and now. Brent at this point last year, however, was closer to $65 per barrel, so perhaps the rally is indeed muted and the collective damage has been done.

Vaccine developments from Pfizer/BioNTech and Moderna hold out promise of widespread vaccinations at some point in 2021. That’s good news, but could be adding to the complacency that’s driving viral infections higher in the United States. Cases are moderating elsewhere, however, as stringent lockdown measures prove effective. Confidence was further supported by a meeting of OPEC+ ministers that did not end in a messy divorce. In the end, Brent rallied by 2.2% to finish trading last week at $49.25 per barrel, less volatile than we expected.

In the Buddhist line of reasoning, we are what we think we are. All of what we are and experience in the world arises from our own thoughts. We make a subconscious choice to experience the world the way we do. For linguistics, we use the tools of language – words – to provide meaning, but this meaning is largely a metaphoric process. Nearly a year in to the pandemic, our metaphoric processes have eroded enough to no longer be shocked to see the 2,439 deaths from COVID-19 in the United States on Saturday. At the start, even a few deaths per day was highly alarming. In essence, we’re used to it. And our experience with language tells us why.

Think about the word representation. That is what language does; it uses tools like the word to stand for something else. We use words as stand-ins for reality. Words represent the world. If we hyphenate the word – “re-presentation” – does that change your experience with it given the emphasis on “presenting again?” The media scholar Neil Postman noted that language is largely a representation of something else, largely in the Buddhist notion that we think our own reality into existence. A representation is similar to A=B in a way, an idea that Postman uses to proclaim that all language is a metaphor. What does “oil” re-present? Concrete ideas represented as words “imply a static … system of polarized categories that hardly seem to represent what really happens,” Postman said. Nietzsche took this a step further, arguing all “concepts are metaphors which do not correspond to reality.” Although all concepts are human inventions, created by common agreement on meaning to facilitate ease of communication, we forget this fact after inventing them, and come to believe that they are “true” and do correspond to reality. Again, what is “oil?”

This is a transactional psychology. Who people are and how they view their environment is a product of a “simultaneous, highly complex and continuing bargaining process” and this process takes place in the mind as much as it does in the external stimulus feeding that mind. What we perceive is a function of our previous experience. This perception becomes permanent until and unless we become frustrated with our assumptions and seek to redefine them.

So how does this impact the market? Let’s look at data from one state – Alaska – to examine the disconnect between the pandemic and the economic outlook as reflected by market data. Alaska on May 30 recorded 10 deaths total attributed to complications from COVID-19. Brent ended May at around $35 per barrel. The Dow Jones Industrial Average closed down modestly at 25,383 points. The US economy, meanwhile, was about two months into the CARES Act that saw $1,200 checks delivered to households and supplemented state unemployment insurance payments with $600 in federal support. The EIA in its short-term market report for May forecast global petroleum and liquids demand would average 92.6 million bpd in 2020, a decrease of 8.1 million bpd from last year. Now, however, the total number of deaths attributed to COVID-19 in Alaska are up 1,300% from the end of May. Brent crude oil is now at $50 and the EIA expects fourth quarter demand to come in at 97.3 million bpd in the fourth quarter. The Dow is well above 30,000. Our mindset since May has clearly shifted toward acceptance and complacency, so much so that we are no long shocked by the staggering daily death toll of the pandemic. In fact, the market seems to ignore that, instead looking to an untested, and unknown, future.

The market bets on that future, and that market future has looked arguably brighter in the wake of the April negativity for crude oil. But perhaps only because we think it does. In reality, it might not be that way. Descartes said I think, therefore I am. To put it another way, because my mind is able to conceptualize reality using words, I create reality and therefore I must exist within that creation. For Nietzsche, people use “fixed designations in order to make the unreal appear as real.” We’re comfortable with that reality until something comes along, like the pandemic, to make us uncomfortable. Martin Heidegger agreed, saying we become depressed because our “referential totality” – the combined holistic experience of our reality – is changing.

We’re used to this. The pandemic has upended our notion of reality in profound ways. Enough so that our concept of normal includes 2,000 people dying every single day. That’s a sad reality, but a reality nonetheless. We’ll find out Tuesday what reality looks like on the crude oil market when the EIA issues it’s latest assessment on future demand. For now, though, in the world’s largest economy, total products supplied, a proxy for demand over the last four-week period are down 9% from the same period last year. Gasoline supplied is down 9.9% from last year and distillates, including diesel, are down 3.4%. Those are not numbers supportive of a rally in crude oil. Yet, our reality is changing and with it comes new trends in the price of oil.

The market focus will center on Tuesday, when the EIA issues its next forecast on crude oil prices and demand. We would expect demand in the first quarter to improve, but we have to get there first. The US president continues to challenge, without merit, democracy itself. And the political elite continue to support him. That is a toxic climate that will not disappear on inauguration day. It’s part of the new normal. The people we’ve spoken with seem to think demand short-term will diminish and drag crude oil prices with it. We’re sticking with our guns, though, thinking the price of crude will fluctuate by at least +/- 3% on the week.

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