Crude oil is up 23% over the past year and it has started making an impact; US 3-year bond yields at a 11-year high

Crude oil at $65.5 a barrel is up 23% over the past year and Brent is up some 27% during the same period. Gasoline prices are up 16% over the past year and we aren’t yet in the US driving season (which pushes up the price and begins in July).

The impact of oil prices is being felt with oil dependent companies like airlines already seeing margins squeezed. Airlines have built the most capacity in history with both Airbus and Boeing having record order books. If oil moves up further and/or demand falls we will see major stress in the sector. US airlines are very susceptible given they don’t hedge oil prices much. And to add airlines just have a profit margin of 6% globally despite record demand and low(ish) oil prices.

Meanwhile, US 3-year bond yields at 2.45% were the highest in 11 years. Bond prices for the 10-year and 30-year issuances nudged upwards as well. Producer price inflation in the US at 2.9% was higher than expected (due to oil prices) which probably caused the markets to expect higher interest rates and therefore higher yields.

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