People want to fly, and American Air’s stock takes off

Stocks had a mixed close yesterday despite a handshake between Republican lawmakers and the President because the Fed is still talking smack about rate hikes. NVIDEA enjoyed a $1 trillion market capitalization briefly but could not manage to hold it through the close as AI fever continued to infect tech shares, mostly positively.

“I just want to say one word to you… Plastics” Crude oil is always a big topic on Wall Street… always has been. Standard Oil Company of California joined the Dow Jones Industrial Average in the early 1920s for a brief period (it came back in 1924) and Standard Oil of New Jersey joined in October of 1928, but prior to that, no oil companies were admitted into the hallowed club. At the same time, Chrysler Corp along with lesser-known Nash Motors made their debut on the Dow as well. In 1976, standard Oil of New Jersey became Exxon Corporation, the descendent of the oil giant we know today. At that point Standard Oil Company of California was still part of the index but was not yet referred to by the name that we know it as today, Chevron, the name change would happen in the mid-1980s, and Chevron is the only remaining big oil company on the Dow today as Exxon Mobil was dropped in 2020. There are no longer any auto manufacturers on the list, though there are 5 technology-oriented companies in the group. I suppose that represents the “industrial” output of the US these days, though it certainly does not have a correlation to the US’ reliance on the automobile… AND FUEL, for that matter.

Today, there are roughly 285 million vehicles on the road in the US, up from 193 million in 1990. That’s a lot of hungry vehicles to feed. There are also airplanes, locomotives, and ships/boats to feed as well. So, as you would suspect there is a close relationship between transportation and crude oil demand. Enter: Tesla and environmental consciousness. Suddenly, many investors are wondering whether oil companies will even exist in the near future. I have a good friend who has been in the energy business for some time, and I asked him what he thought about the future of companies like Exxon Mobil and Chevron. We were having a brilliant lunch overlooking the ocean, and he put down his adult beverage, looked at me and smiled. He told me that despite the number of Teslas that have been popping up in the New York, South Florida, and California areas, there was a vast world of gasoline/diesel powered vehicles that still ply the roads and highways every day. In fact, the US only represents some 20% of the vehicles that are operational worldwide. He acknowledged that EVs like Tesla are getting better and are becoming more popular worldwide, but demand for gasoline was not going anywhere anytime soon.

But the story for crude oil is a much more complex one. Did you know that only 43% of a barrel of crude oil is distilled into gasoline? What happens to the other 57%? Well, 23% goes to heating oil and diesel fuel. Diesel is used in trucks and for marine transportation. There is a path for electrification in the marine industry and certainly in trucking… but heating seems like a longer road. Jet fuel makes up another 9% and while there are surely companies working on electric aviation motors, that also seems a long way off. I would be remiss if I didn’t mention that Asphalt… you know that stuff that makes up the roads we drive on, is a crude oil biproduct and it makes up some 3% of the barrel of crude. Did you know that petcoke (or coke) is used to produce fertilizer? Coke represents 5% of a barrel of crude. Another 3% goes to lubricants… which are even used in electric vehicles!! Finally, there is that tagline quote above from the famous 1967 movie The Graduate, which starred a young Dustin Hoffman as Benjamin Braddock. Yes, plastics. Look around you… go on. How many things in your immediate eyeshot have plastics in them? Enough said? Roughly 4% of global oil production goes to production of plastic. I realized at that point that I should have phrased the question differently.

Clearly, crude oil and its well-known producers, refiners, and transporters are not going anywhere anytime soon. My friend did acknowledge that there may be some time in the future… well beyond, where there will no longer be combustion engines on the road, but certainly not in the near future. He also admitted that he kind-of liked the idea of owning an EV. Tesla is still not a member of the Dow Jones Industrial Average. Oh, and the electricity used to power those EVs? Petrochemicals are responsible for nearly 40% of it. So, I suppose that, for now, at least, we should continue to pay attention to the energy sector.

WHAT’S SHAKIN’ THIS MORNIN’

Advance Auto Parts Inc (AAP) shares are lower by -25.71% in the premarket after the company missed EPS estimates by -72.82% (not a typo). The company also slashed its full year guidance and cut its dividend. Dividend yield: TBD. Potential average analyst target upside: +29.3%.

American Airlines Group (AAL) shares are higher by +2.60% in the premarket after announcing that it beat EPS estimates with a slight miss in revenues. The company reaffirmed its full year guidance but raised its Q2 guidance. Potential average analyst target upside: +21.2%.

YESTERDAY’S MARKET’S

Stocks had a mixed close yesterday as investors were reminded that the Fed may hike rates yet further. The S&P500 broke even, the Dow Jones Industrial Average declined by -0.15%, the Nasdaq Composite advanced by +0.32%, and the Russell 2000 Index slipped by -0.32%. Bonds gained and 10-year Treasury note yields gave up -11 basis points to 3.68%. Cryptos gained +3.85% and Bitcoin climbed by +0.29%.

NEXT UP

• MNI Chicago PMI (May) may have declined to 47.2 from 48.6.
• JOLTS Job Openings (April) is expected to show 9.4 million job vacancies, down from the prior month’s 9.59 million openings.
• Today’s Fed talk: Collins, Bowman, Harker, and Jefferson.
• After the closing bell earnings announcements: Victoria’s Secret, Nordstrom, C3.ai, Crowdstrike, Veeva Systems, Okta, Salesforce, and Chewy.