Crude Oil Price: did 'inflection point' remark by Jay Powell, Fed Reserve Chief, affect the markets?
Those of us who are very much familiar with the terms
such as inflation, growth and even the dreaded recession from economists during
volatile periods, heard a less-familiar term on April, 4, from Jay Powell, the
Chair of Fed Reserve.
Mr Powell, speaking on CBS’s 60 Minutes programme,
said that the US economy is reaching what he called, ‘inflection point’.
No sooner had it become the focal point of his interview
than media buzz continued hovering over it like a malfunctioning toy drone.
Inflection point or point of inflection is more of a
math term than that of an economic, although the latter may have borrowed it
from the former as it got some ingredients for a formidable soundbite.
In the field of calculus in math, it is a point on a
curve where the gradient or slope is zero with the same thing on either side of
the point having the same sign – either positive or negative.
With three simple steps in differentiation, a branch
of calculus, it is easy to determine whether the curve in question has got a
point of inflection that the economists like Mr Powell refers to as inflection
point.
In order to produce the inflection point in the
above animation, I used differentiation, along with little manipulation of
algebra.
If that is the inflection point that Mr Powell
meant, he got a point: the rate of growth did accelerate before it, thanks to
the combination of vaccination rollout and of course, the unprecedented
economic stimulus package.
When an economy follows this path, it is inevitable
that it reaches a plateau – the worrying aspect that Mr Powell implied.
The Chair of the Fed Reserve thinks the US economy
is heading toward this region of the curve, if it hasn’t reached there yet.
Mr Powell thinks that the new surges in infections
is to blame for the risk; in addition, if the momentum of the vaccination
rollout slows down, along with ignoring the social distancing measures and mask
wearing, he thinks the US will stay at the plateau longer than it could afford
to do so.
In short, it’s a form of warning against being
complacent in light of the stimulus package.
Markets, including crude oil markets, perhaps, may
have got the wind of this scenario during the last few weeks. Crude oil analysts,
for example, were at a loss, when they could not account for the fall of oil
price, when the factors in favour of the polar opposite were there for all to see.
Eventually, they settled for the Iranian Factor: the
possibility of Iran entering crude oil markets with a bang.
It was short-lived, though.
No sooner had Iran unveiled its new uranium
enrichment plant than it was subjected to what Iran called, ‘nuclear
terrorism’; the facility lost its power supply due to a cyberattack; Iran
blamed it on Israel and the latter did not deny it.
Crude oil markets saw it as an obstacle to steady
supply from the volatile region and responded accordingly; the crude oil price
went up by a moderate amount in the Asian markets - in the early hours – that
continued into the day.
It’s highly unlikely that Iran and Israel will be caught up
in a full-blown war over the incident; there had been much more serious form of
‘nuclear
terrorism’ before in Iran: the same plant was hit by a mysterious fire
a few months ago, resulting in extensive damage to it; the chief Iranian nuclear
scientist was murdered at a location, a stone’s throw away from Tehran, Iranian
capital, last year.
In this context, crude oil markets appeared to have just
overreacted to the supply concerns over this issue; Mr Powell’s assertion has
much more academic substance than misplaced emotions in order to gauge the
movement of the oil price.
