Publications: Notes at the Margin

The Three I's: Inventories, Interest Rates, and Investment (June 26, 2023)


Inventories represent the first of the three “I’s” named in our report title. Managing inventories is not necessarily easy. A firm seeking less exposure might cut purchases with the goal of having lower stocks when the reporting period ends, only to find that its stocks increased because sales declined. Firms that purchase crude oil for refining today may find themselves in the same situation.


Higher interest rates—the second of our three I’s—will likely slow economic growth, hold oil consumption below projected levels, and further incentivize refiners and traders to lower inventories. Over the last two weeks, most central banks raised interest rates. The US Federal Reserve was the exception, but the Fed’s chair, Jerome Powell, told the US Congress last week that further increases are coming. The raised rates boost the cost of holding inventories, a point we have emphasized on several occasions.


Investment in oil and gas exploration, our third “I,” will be restricted because investors are unwilling to advance funds to oil companies given the uncertainty of oil demand and in the market thanks to the Saudis’ willingness to “do whatever it takes” to fund their ambitious—and in our view impossible—dreams for remaking their country.


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