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Yahoo Finance’s Alexis Christoforous and Bob Iaccino, Path Trading Partners Co-Founder & Chief Market Strategist, discuss the latest moves in the energy space.
ALEXIS CHRISTOFOROUS: I want to bring in Bob giachino now. He's co-founder of Path Trading Partners. Bob, thanks for being with us. We spoke to a market guest earlier today, John Petrides, who believes we are having a crisis of confidence when it comes to the Federal Reserve right now. Would you agree with that?
BOB IACCINO: I think it's more of a lack of understanding as to what the Federal Reserve has been trying to say and do. I've always thought that the Federal Reserve is usually pretty clear, not necessarily pretty timely, on what it is they wanted to do. When you look at past Jerome Powell statements, Richard Clarida statements, they've basically stood pat on the idea that they were going to let inflation run above 2% for what they called an adjusted average.
I've always been kind of confused as to what an adjusted average is. I don't know how to do the math on an adjusted average. So I think maybe the market potentially just doesn't understand what these phrases mean. But again, I think it's pretty clear what they've said, and they're sticking to what they've said. So I don't feel like it's a crisis of confidence. No, I just think we see inflation coming, and the Fed's going to let it run.
JARED BLIKRE: I just want to get your take, going back to the energy market here. I think it underscores some important trends that are under place underway right now, especially when you look at the potential for price inflation in the back half of the year, all these input prices rising. What do you make of this latest OPEC Plus decision? There was a little bit of wrangling with Russia. I think they got an exemption here. How does it all fit together with-- for you?
BOB IACCINO: Well, that's a great question, Jared, and I wish I could answer it today. The thing about OPEC and OPEC Plus is, there's decisions, there's statements, and then there's compliance. One of the things we saw in the last statement when they decided to increase production by 500,000 barrels a day and then review it every single month, and then a week later, Saudi Arabia cut unilaterally one million barrels a day. And in this particular agreement, not the one they just announced, but the prior one, there was very high compliance to that agreement.
So we were able to see what the supply was going to be versus the demand. I think the demand is in question, given that they're leaving production the same. Does that mean that Saudi Arabia is going to put back those barrels they unilaterally cut? Does that mean Russia's exemption means they get to go more than the 500,000 barrels they were allowed to go in the last month? There's a lot of confusion as to what this is actually going to mean in oil on the ground.
Now we had actually put out a long position on March 2nd that we exited at $64. That was our target. I think you're seeing a little bit of selling off now from the highs of the day, simply because of reaching levels and what's going on with the dollar. The dollar is at its strongest day since October 26, 2020, a pretty big move on the dollar index. And that, obviously, is going to weaken commodity prices. You've seen that in copper as well, Jared.
JARED BLIKRE: Yeah, well, let me just follow up on that. Could it be that this is actually a boon for-- what Opec Plus has done is going to be a boom for the US energy market. Because Prince Abdulaziz bin Salman spoke after the OPEC Plus decision. And he said, the days of, drill, baby, drill, are over, referring to US shale production. But nevertheless, we're seeing higher prices now. Isn't that only going to incentivize more drilling here?
BOB IACCINO: So, yes, where it's allowed. I mean, obviously, we have a different administration in the White House, and we have a Democratic Congress who is well known to be less favorable to fossil fuels. So there'll be less opportunity to drill, baby, drill. But I think that the issue that people have always had with shale-- and I believe the Saudis know this-- is that you don't just turn the wells on. It's not a faucet. You don't just walk over and turn the knob, and the oil starts flowing. You have to hire, you have to drill.
Some of the wells that were closed during that Texas freeze are permanent. And I think Saudi Arabia will realize that. My estimate is about 400,000 barrels a day was permanently shut down because the wells are either too expensive, non-productive, or too damaged to reopen. So there's an opportunity here for Saudi Arabia and OPEC and OPEC Plus to get these prices back to where, about four or five months ago, I said they would never be again. I said you wouldn't see $90 a barrel of oil. I'm not calling for $90 a barrel, but I think there's a potential for it to get there, where six months ago, I said there was no potential for it to get back there.
ALEXIS CHRISTOFOROUS: Wow, what a rise, right? And how quickly, too. Bob, I want to ask your thoughts on what we're seeing when it comes to precious metals. I'm looking at gold right now, off more than 1%. And I'm trying to make sense of it because if we're so preoccupied with inflation and gold has traditionally been an inflation hedge, why is it falling today with the rest of the market?
BOB IACCINO: Well, it's an interesting point. Gold's fallen out of favor tremendously as an inflation hedge. And I think it's because when you look at the inflation expectation curve, you're looking at short-term inflation expectations, but not long-term inflation expectations. Jerome Powell actually echoed that in today's speech for the Wall Street Journal. He basically said that we don't think these trends will sustain. We think there'll be inflation, but it won't sustain. And if that's the case, then gold short term isn't really your friend because it's not your friend long term.
If you believe the Fed would actually act on inflation at 2 and 1/2% or 2 and 3/4%, you really don't want to be in gold because it's going to lose its value pretty quickly. I also think Bitcoin's taking quite a bit of luster from gold just in general as another theoretical store of value. I own some Bitcoin and I own some gold. I'm hanging on to both of them. But quite frankly, gold's inflation hedge capabilities has really diminished because the long-term outlook for inflation doesn't seem to really be there in this what I call this Groupon economy of discounting everywhere we go.
ALEXIS CHRISTOFOROUS: Hey, bob, what does the market want to hear from Jay Powell? I mean, he's been sort of walking this tightrope for quite some time. You think him saying we're going to do all we can to keep the economy buttressed and we're going to keep interest rates low for long would do the trick. It doesn't seem to be. So what would be the magic words from Powell to help this market?
BOB IACCINO: Wow, that's a great question. I think what I've been looking for is that if, then statement. And I haven't seen it. And I put that in my last note, where if you get an if, then statement from the Fed, where they say if inflation goes to here, then we will enact Operation Twist. We will start yield curve control. I'm looking for an if, then statement, and we're not getting one. We're just kind of getting an if statement. And basically, the if statement today was, well, if it goes too fast-- and then it just kind of stopped. I mean, I'm paraphrasing.
There is no real clarity-- back to your point, Jared, about a problem with confidence in the Fed. There's no real clarity as when these actions would take place. And that puts this uncertainty in the market. Every strategist analyst will tell you that uncertainty is the enemy of the market. And that's what we're seeing right now, is just general uncertainty, both with crude oil and inflation, and then to a certain degree, the Fed as well.
ALEXIS CHRISTOFOROUS: Yeah, it's a recipe for today's sell-off, that's for sure. Bob Iaccino of Path Trading Partners, thanks so much for being with us.