Stocks sold off yesterday, unable to hold on to earlier gains as fear of a larger Russian invasion invaded the minds of traders. It turns out that those fears were not unfounded as Russia expanded its incursion WHILE YOU SLEPT.
Oil keeps things moving smoothly…until it doesn’t. I have a good friend who is an energy man. No, he is not a guy who surrounds himself with flashing screens pocked with charts going in every which way. He knows energy because it is how he earned a living for the better part of his adult life. I wrote about my friend a few years back (wow, time does fly these days) when the price of crude had dipped below $40, after it lived around $50 since its epic fall in early 2015. Of course, I was eager to get his thoughts on the matter. I foolishly asked him if that was the end of big energy. While he often grumbled that the energy business was a shell (no pun intended) of its earlier self, his response to my question was remarkable. He laughingly said that he would buy anywhere below $40, sight unseen. He said this without consulting any charts, math equations, or analyst reports. I asked what his investment thesis was, and he replied, “it’s going back to 60, trust me,” to which I enquired further. How did he know that? He told me that the world would not let prices stay at 40. I have to admit, I was not convinced at the time. OPEC had lost its 20th century cachet as the US became less reliant on middle east oil and turned into a net exporter of energy product. The large energy companies were bloated and not able to grow earnings as in the past. Elon Musk created a car company with battery-powered cars that were sleek, very fast, and very popular. Endowments and even some hedge funds began to shun energy investments because of their impact on the environment. There were surely better investments than crude oil or companies like Chevron, which pretty much traded sideways for the better part of a decade. When Chevron dipped to its 2015 lows in 2020, he sent a text message saying that he was buying as the rest of Wall Street proper, was selling. I called and enquired…and got the same answer…they (meaning the world) won’t let oil stay down for too long. Well, my friend was correct. Crude rose and so did Chevron.
Turn the clock forward to late Spring 2021 and I sat next to my friend and had an amazing lunch overlooking the water. I had by that point, changed my tune and turned more constructive on energy. Chevron was back over $100, and crude was, indeed back over $60/barrel. Teslas were everywhere and there were a handful of other companies, including Ford and GM, that had ambitious plans to join Tesla’s ranks. I asked my friend if he thought that it was time to retire the energy trade. He chuckled in his charming way…I knew what was coming. He first reminded me that natural gas and oil are still used around the world to generate a good chunk of the electricity used to charge those Tesla batteries. He further reminded me of just how many combustion engine cars there were on the roads around the world… outside the posh Miami neighborhood in which we dined. Oh, and that biproduct of oil drilling, natural gas, is used to heat our homes. He admitted that oil, as we knew it would eventually get to the end of the road, but not in our lifetimes.
Turn the clock forward to today. Russia, the world’s 3rd largest energy producer in the world has launched a military assault on its neighbor. The Russian President has fashioned a number of reasons for the attack, some even comical. Russia’s economy is highly reliant on its energy exports and any disruption to them would be devastating. Just yesterday I wrote about how Russian energy makes up 7% of the United States’ energy imports. Additionally, some 17% of China’s crude oil imports come from Russia. Nearly 40% of Europe’s natural gas supply comes from Russia. That gas comes to Europe through pipelines, many of which travel across Ukraine, and Russia pays billions of dollars for those passage rights. One economist recently referred to Russia as a big gas station. If that is the case, then it is Ukraine which are pumps at that gas station. Russia clearly would not like the prospect of its gas pumps being manned by NATO. So, it is clear that keeping NATO out of Ukraine is a matter of strategic, economic importance. Today, we expect to hear from world leaders who will likely step up sanctions on Russia. To make those sanctions count, they must cut deep into the Russian economy and that can only be achieved through energy embargoes. Economists have predicted that the Russian economy will surely enter a recession as a result. The same economists predict that Europe could possibly enter a recession as well, resulting from higher energy costs. Those same models appear to spare the US from a recession; however, it won’t be spared from higher inflation, longer. The Fed will have a tricky path to navigate with higher energy costs prevailing because of this trouble in eastern Europe. I haven’t asked my friend about his thoughts on the latest developments. When we speak, I will ask him if crude oil at $99/barrel (which is where it is this morning) can last. He is likely to respond with a chuckle; I know what comes after that.
YESTERDAY’S MARKETS
Stocks fell in yesterday’s session as traders feared further Russian incursions. The S&P500 fell by -1.84%, the Dow Jones Industrial Average lost -1.38%, the Nasdaq Composite Index dropped -2.57%, the Russell 2000 gave up -1.82%, and the S&P500 ESG Index declined by -1.91%. Bonds fell and 10-year Treasury Note yields gained +6 basis points to 1.99%. Cryptos gained +0/91% and Bitcoin slipped by -0.92%.
NXT UP