By SNW Asset Management via

Last week West Texas Intermediate (WTI) oil prices rose to $63 per barrel, up from $27 in early 2016. Rising oil prices can be inflationary and in extreme cases, like the 1973 and 1979 oil shocks, rapidly rising oil prices can lead to recessions and inflation. Those who remember shortages and gas lines know it’s no fun pushing a large Chevy Impala after the gas tank runs dry!

But this time rising oil prices are not a slippery slope to inflation.

Oil prices are rising now from very low levels as record inventories are finally coming back into balance (see chart below). As you remember, back in 2013 and 2014 inventories were low, prices were above $100 barrel and OPEC decided to flood the oil market to put the U.S. shale oil industry out of business.

When that didn’t work, OPEC and other oil producing nations reduced production, and inventories slowly came back into balance. Better to earn more dollars on less production than to go bankrupt pumping lots of oil! To be fair, today’s rising prices are not just a function of lower inventories, but also a function of strong energy demand and higher global tensions.

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