There has to this point been one key element missing from “reflation.” Or maybe it hasn’t been missing, it just hasn’t been consistent with what I would consider that term to mean. The WTI price remains quite range-bound even though there is at the moment only wind at its back. OPEC had just pledged less production, and though US production has come up a bit it is largely still depressed. And more than those there is a great deal of risk appetite appearing in so many markets.

But WTI only trades back and forth, managing above $50 as now only on occasion. All that has been managed so far is to erase the second oil crash (to the low on February 11) which was actually the smaller one. Perhaps it is just beginning to break out, but there are suggestions that this might be as good as it gets, relatively speaking. For one, the WTI futures curve is now, to put it mildly, odd. The natural state of that curve is full backwardation short to long; that is the negative time spread that keeps oil flowing in current markets rather than being directed to sit idle in storage awaiting future release. Unlike gold or some other commodities, there is very little benefit to unused oil (unless, of course, you are China and wish to convert “dollar” lending into tangible financial collateral).

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The futures curve has flattened out before, notably at its high point in early June. But at that time it had done so in consistent fashion as you would expect of normalization, which is what “reflation” is really supposed to be about. In other words, the downward “hook” that is the telltale sign of ongoing “dollar” problems should erase to where the front end bends back up in a smoother reverse (backwardation). At June 8, that almost seemed to be where it was going.

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Over the summer, particularly after early July, “dollar” issues were reformed maybe in other outlets to where contango in the front not just reappeared but stayed no matter what the rest of the curve did. It has led in more recent weeks to what you see above, where we now have the sharp contango front of the “dollar” married to a limited but noticeable backwardation mid-curve and out.

As to the backwardation specifically, it would indicate a possible view of supply and demand finally being brought back toward more balanced conditions. That may be the effect of the OPEC deal as the oil market processes its potential effects (as well as how realistic it might be given the history of such deals in the past). But backwardation is here at $55, basically where the entire oil curve has been since the second crash to start this year. It is not “normalization” in the fullest sense, rather just less dramatically imbalanced.

It makes sense given the amount of oil that will have to come back on the market at some point. The worldwide buildup of inventory was immense, and I have serious doubts whether there is any good estimate for just how much might be floating right now at various heavy ports and more likely beyond-normal ports around the world.

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If the WTI curve is registering some minor contango at around $55 rather than $75 or even $85, that is a possible sign that, again, there could be a lid on oil prices. It’s not just inventory that is driving this view, either, as that would likewise signal little effective change on the “demand” side. Production is coming down on price, but demand is not coming back up.

The transition effects of oil on inflation are obvious, especially the CPI that is practically built around energy price changes. The recent meandering of the consumer price index has been a reflection of the WTI rebound from its crash low last year and at the start of this one. As of this week, oil prices are up an impressive sounding 40% year-over-year, but that isn’t the delayed effects of “money printing” it is instead only because WTI this week last December was less than $37. In the same week in December 2014, oil was above $61 even though by then the first crash was already a month old and intensifying.

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In December 2013, of course, WTI spot was almost $100. This is the problem with factors like the CPI and interpretations that are predicated on it being a realistic or realistically attached assessment of actual economic conditions. Oil prices fell from $100 to less than $30, and then rebounded only to around $50, being closer to the bottom than where they started. For the CPI and “reflation”, all that is factored is the latest move, not all that goes into how and why oil is still down more than 50%!

There is more economic information instead in oil (and gasoline) inventories than the 40% year-over-year increase. However, if spot oil prices stick only at around $51.50 (as modeled below) and don’t manage any more gains over the next year, even that “positive” attribute will quickly disappear.

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This is what I mean by suggesting something is missing from “reflation” as it relates to the key elements contained in oil, yet another example of the economic fallacy of positive numbers. Reflation is not found in going from $25 to $50, it would be found in the second $50 that gets oil prices back to $100. In that scenario there would be the fullest extent of what I believe is meant by recovery at least in the mainstream view of it: direct and consistent monetary policy success (which is harmful especially as far as $100 oil goes, but I digress), oil demand that quickly draws down what “transitorily” went into inventory, and resumed production reflected by contango from the short end of the curve to the long.

I have not even factored the “dollar” into any of that, which is yet another risk in terms of not just reflation but even the smallest amount of meaningful improvement in the real economy. As noted on the WTI futures curves above, despite all that is supposed to be favorable for oil prices, the “dollar” is still there looming.

How much further can “reflation” go? Obviously, since at this point it is exclusively a paradigm shift in the collective imagination only, it is thus theoretically only limited by that collective imagination, or what was once called exuberance – that was 2013. Unlike 2013, however, there are physical realities like oil that will be a reminder (financial as well as mental) of the often great difference between hope and actual conditions, and the very large risks that remain between them.