The ups and downs of energy

Stocks had a wild ride yesterday, zigzagging in response to the news feeds on the Ukraine crisis.  Traders may have already factored in the US ban on Russian oil, announced by the President Biden yesterday morning.

Feels like the very first time.  President Biden announced a complete energy embargo on Russia yesterday morning. We all kind-of knew that it was coming at some point. For some reason, which I am not sure I understand, the news outlets pre-announced the President’s announcement hours before it actually took place. In any case, the markets responded with a “meh”. As mentioned, the move was largely expected and, while it was largely applauded, the move is considered to be symbolic as Russian - US energy exports make up a small part of Russia’s output. Further, Russian energy exports make up a small part of US imports. It is not likely that the US will suffer supply outages such as the ones experienced in the 1970s OPEC oil embargo, but prices at the pump are expected to continue to rise. Let’s zoom out and look at the broader picture and place this current crisis in a historic framework.

Regardless of which nation is or is not sanctioning Russian oil supply, exports are suffering. Most of the world’s largest energy concerns have announced that they will stop buying Russian oil.  Further, few shipping companies are willing to transport Russian supply, fearing sanction, payment, and currency risks. Some reports indicate that up to 50% of Russian product has effectively been removed from the global supply.  Goldman Sachs estimates that number to be 3 million barrels per day. That makes it the 5th largest disruption since World War II. We all know about the Arab Oil embargo in 1973. That event left an outage of some 4.3 million barrels per day and resulted in a +279% jump in crude prices.  That helped spark inflation that topped around +12% and resulted in a recession which lasted until March 1975. In 1980, the Iran – Iraq war caused a daily disruption of around 4.1 million barrels. That ushered in a +50% spike in oil prices which accentuated the already high +14% inflation in the US. The Fed at the time was letting inflation run hoping to lower unemployment. Once inflation got out of hand, the Fed was forced to slam on the brakes, raising interest rates so aggressively, that a recession ensued. In 1990 Iraq invaded Kuwait causing another 4.3 million barrels per day outage. That caused oil prices to spike by some +131%.  Inflation in the US topped out at +6.16% and the result was…you guessed it, a recession. Indeed, the next 2 recessions were ushered in by a +175% rise (2001) and a +140% gain (2008) in crude prices. Interestingly, those two recessions featured more subdued consumer inflation.

Currently, inflation stands at +7.5% and is expected to have risen to +7.8% last month.  Since the onset of the pandemic recession, crude oil prices have jumped by +113% and by some +55% from a year ago. The Fed will likely embark on its interest rate hiking next week, oil prices have the possibility of going higher, and inflation continues to rise. History doesn’t often repeat itself with the markets, but it certainly does rhyme sometimes. Hopefully this time, we will end up with neither repeat nor rhyme.

WHAT’S SHAKIN’

Bumble Inc (BMBL) is trading higher by +22% in the pre-market after it announced a miss on both earnings and EPS after the close. The company offered full year guidance that exceeded analyst estimates garnering it an upgrade to OUTPERFORM by BMO Capital Markets.  Potential average analyst target price upside: +112.1%.

MongoDB Inc (MDB) shares are higher by +11.85% after it announced that it beat EPS and Revenue targets by +56.21% and +5.91% respectively.  The company also offered Q1 and full year guidance that was above analysts’ expectations.  Potential average analyst target price upside: +69.6%.

YESTERDAY’S MARKETS

Markets were down, then up, and then closed down as the war-related volatility drove the price action of the session. The S&P500 fell by -0.72%, the Dow Jones Industrial Average traded lower by -0.56%, the Nasdaq Composite Index lost -0.28%, the Russell 2000 Index gained +0.60%, and the S&P500 ESG Index slipped by -0.70%. Bonds fell and 10-year Treasury Note yields climbed by +11 basis points to 1.84%. Cryptos added +2.75% and Bitcoin advanced by +1.76%.

NXT UP

  • JOLTS Job Openings (Jan) may show 10.95 million job vacancies compared to the prior month’s 10.925 million job tally.
  • The Treasury will auction $34 Billion 10-Year Notes today.
  • After the closing bell, we will get earnings from Crowdstrike, Marqeta, and Asana.