Oil up, yields up, stocks down

Stocks ended the session in the red after seeing earlier gains as the market cannot seem to shake its distaste for inflation. Bond yields jumped in response to higher crude oil prices, souring last week’s rally in stocks.

Oil’s well that ends well. Were you paying attention when crude oil was at -$37.63 a barrel? It happened in April of 2020 just as the world was getting upended by the onset of COVID. Businesses were shuttering, people were dying, the financial markets were in full panic mode, interest rates were at 0%, and the roads…were essentially empty. Demand for crude oil had fallen through the floor as cars, trucks, buses, airplanes, cruise ships, and even industry laid fallow, collecting dust. The only way to describe the situation is with the once-overused word unprecedented. Crude oil itself is not particularly useful to anyone, but once it is refined, it becomes the important product that effects all of us, every day, in every way. In April of 2020, crude oil was piling up in storage facilities waiting to be refined, transported, delivered, and consumed. As no one was consuming at the time, the entire system jammed up leaving freshly extracted crude oil with nowhere to go. This left drillers in an awkward position in which they would pay you to take inventory off their hands because storage would have cost them more. Re-read what I just wrote… you get paid to take freshly extracted crude oil. It’s too bad you can’t just pour the stuff into your car. During that period, speculative hedge funds were buying up barges and oil tankers, hoping to store the virtually free crude until the market improved. This simply drove the price of storage even higher…and crude futures lower. Well, as you might guess, that didn’t last too long. By summer of 2020, China had already begun to emerge from its first lockdown so industrial demand began to pick up. In the US, some restrictions began to ease up, but demand was still extremely low by historical standards. Are you ready for this? Unleaded gasoline was at $1.98 per gallon on this very day in 2020. Thereafter, it rose to around $2.20 and remained around that level for the rest of the year. As more and more restrictions began to lift with the release of the vaccine, demand began to grow once again. Crude oil started 2021 at around $48 / barrel and rose to around $60 by the end of the first quarter. Gasoline had risen to $2.87 / gallon, up by some +44% from a year earlier. Should we just stop the conversation here? Think about it, gasoline prices rose by +44% in just 1 year. That, my friends, was the beginning of inflation.

Let us take a step back for a second. My regular readers know that I like to often use the odd saying that “oil IS the oil of all industry.” The saying implies that slimy stuff is used in just about everything. From plastics to synthetic materials (clothing), from cosmetics to even food, oil is not simply a lubricant or a fuel product. Taking it a step further, even environmentally friendly meat substitute must be transported by a fuel consuming vehicle…after being manufactured at a plant, whose machines rely on oil-based lubricant. The electricity from that plant is likely to have come from a generation facility which burned natural gas, another biproduct of oil drilling. So, technically, the cost of each bite you take of your Beyond Burger includes the cost of fossil fuel. When it goes up, so does that cost. Put the burger down for a moment and let’s talk about the direct cost to you…and me. Though I love a nice bike ride, I am unable to get to work without the use of my car. That means my household budget for commuting was steeply on the climb by mid-2021. When we speak of inflation, we typically refer to year over year change in price. For reference, Gasoline prices were around +54% higher from June 2020 through June of 2021. Over that same period, crude oil was some +84% higher. Fast-forwarding to the start of 2022, most businesses have reopened, and most workers have returned to the office, leaving demand for crude oil high. At that point, gasoline prices were around +46% higher than they were in January 2021. Crude oil was up by about +59% over that same period. So, if you agree with my “oil IS the oil” saying, you can see that its price growth could have a material impact on your wallet. That was in January of this year, and a few things have changed since. Namely the war in Ukraine which led to major supply disruptions of energy products. Crude oil prices year to date: +50.72%, gasoline year to date: +40.57%. Crude oil year over year: +69%, gasoline year over year: +52%. You can try your level best to escape rising crude oil prices, but you will find yourself on a slippery slope. This morning’s read on West Texas Intermediate Crude futures is around $116 / barrel, up since yesterday’s close…quite a bit higher than the -$37 / barrel we enjoyed for 1 scary day back in 2020.

WHAT’S SHAKIN’

Salesforce.com (CRM) shares are +8.57% higher in the premarket after the company announced that it beat EPS and Revenue estimates by +2.93% and +0.44% respectively. Further, the company raised its full year forward guidance due to strong demand. Potential average analyst target upside: +59.7%.

YESTERDAY’S MARKETS

Stocks made some short-lived attempts at continuing their winning streak but ultimately closed lower under the weight of rising bond yields. The S&P500 slipped by -0.63%, the Dow Jones Industrial Average fell by -0.67%, the Nasdaq Composite Index traded lower by –0.41%, and the Russell 2000 Index dropped by -1.26%. Bonds fell and 10-year Treasury Note Yields added +11 basis points to 2.84%. Cryptos gained +11.75% and Bitcoin rallied by +1.7% after climbing by +7.9% when traditional markets were closed for Memorial Day.

NXT UP

• Construction Spending (April) is expected to show a +0.5% growth for the month, higher than the prior +0.1% reading.
• ISM Manufacturing (May) may have fallen to 54.5 from 55.4.
• JOLTS Jobs Openings (April) is expected to show 11.3 million openings compared to the 11.549 million openings in the prior month.