July 31, 2024 | Crude Oil Rises US$2/B After Israel Assassinates Two Terrorist Leaders

After a Hezbollah attack on a Druze village in the Golan of Israel that killed 12 children playing in a soccer field (total 30 casualties), Israel focused on retribution by targeting the Hezbollah leader (Faud Shukr) who ordered the Majdal Shams attack and killed him and associates in an air attack at his Beirut home. Later they killed one of the Hamas leaders (Ismail Haniyeh) normally living in luxury (and protected in Qatar), when he was in Tehran for the installation of the new Iranian President. There is now concern that the war may expand and that Tehran will allow all its proxies to go to war with Israel. We are not so pessimistic. This was targeted assassinations of key leaders of terrorist groups and had the full support of the US. Given the logistical challenges of flying from Israel to Iran, there must have been some US intelligence support. That Israel could pull this off will be very disconcerting to Iran’s mullahs and IRGC leadership.

Today the market is focused on the FOMC meeting and the key wording used to indicate when the Fed will lower interest rates. The market is discounting a Fed Funds rate cut in September of 25 to 50 BP and then two more cuts later this year. We are only expecting one rate cut this year and, that it would occur after the election. Economic data is showing a decline in inflation data but the economic growth numbers may halt the Fed from action in September. The plethora of data to come before that meeting will be carefully perused. One concern for the Fed is that the large funding requirements of the Treasury could have problems if they lower rates while deficits are so large and funding requirements are over US$2T. They also need to raise funds for maturities. In Q3/24 they need to raise US$750B.

The stock market has been weak as many corporate earnings or guidance has been disappointing and a few black swans have occurred to scramble the news cycles.

• China’s manufacturing activity shrank for a third straight month. There are expectations that Beijing will need to launch new stimulus measures to reverse the protracted property crisis and job security that is a drag on growth. In the meantime energy demand is weak and imports have slowed.
• Iron Ore prices have been plunging as China imports less and has large inventories in storage. China’s steel industry is in disarray and has been dumping products wherever they can find buyers. This causes problems for the steel industry in those countries.
• With shipping disruptions on key global waterways the price of 40-foot shipping containers has jumped from US$1,660 at the end of 2023 to US$6,000.
• US Auto Loans are seeing record write-offs and the highest early stage delinquency in 13 years. Credit card delinquency rates spiked 33% in Q1/24 (VISA). Banks are now taking larger write-downs for credit losses as the economy weakens for lower income Americans.
• NVIDIA insiders have been taking significant profits as they sell their parabolic stock. They sold 5.7M shares over the last three months. Warning!
• Southwest Airlines saw a profit plummet of 46% and is taking urgent action to increase revenue.
• Ford Motor lost US$47,585 per EV car sold in Q2/24.
• Auto manufacturers are seeing large declines in net income. Renault posted a 35% decline for their first half, Stellantis saw its net fall 48%. All the auto stocks plunged.
• Deutsche Bank warned of more significant losses from Commercial real estate. They lost US$517M from this in the recent quarter.
• Blackstone Mortgage Trust (BXMT) cut its dividend by 24% because of defaults and refinancing difficulties.

Mixed economic data continues to sway North American markets as each data piece is scrutinized for signs of the health of the economies. What is holding the US economy up is the government deficit and defense spending.

Data of note:

• US Core PCE prices rose 2.6% in Q2/24 versus the 2.5% forecast.
• US Non-Core Durable Goods Orders fell 6.6% in June versus a forecast of up 0.3%.
• US Q2 GDP rose 2.8% versus a forecast of only 2.0% and compared to 1.4% in Q1/24.
• Canada’s May GDP rose 0.2% month over month versus 0.3% in the prior month.

Summarizing – We surmise that the Fed is boxed in by their policy mistakes. They kept saying in 2023 that inflation was transitory and we now know this as false. They also erred by prematurely calling a pivot in December 2023. If inflation swings higher again in the coming months as we suspect, some FOMC voting members have indicated that they may want to consider raising rates. So the most likely case is ‘higher for longer’. Stagflation is here and consumers are spending less while still facing an onslaught of higher prices making household budgeting tighter. We are likely in the early stage of a consumer recession which is nearly 70% of the US economy. Not a good situation during an election year.

On the wars front:

• The Houthis have started what they call their ‘fifth operation’ which includes attacks on all Israel’s ports and its offshore energy fields. So far they have not had any success with these attacks.
• The US has increased attacks on Syrian terrorist groups supported by Iran after they attacked US bases in Eastern Syria with rockets, drones and missiles. Iran has put on high alert thousands of its paramilitary forces in Iraq and Syria which could increase the fighting in the area.
• The US and Canada (NORAD) scrambled jets to intercept four Chinese and Russian bombers and escorted jet fighters near Alaska and in US air defense space. The concern was that it had previously been only Russian aircraft and now China is working with Russia. This has alarmed US military officials. Russian media is using the term “Our Alaska’.
• Russian troops have captured two more towns around Ukraine’s Donetsk. Russia wants to capture Kharkiv in this summer’s offensive.

Market Update:  We are watching the economic data carefully as it appears that consumers are tapped out and this could drag economies into recession. The offset for the US is the 6% US spending deficit and large war spending that are keeping some areas of the US, with hot economies. The military industrial complex and areas where weaponry is built are strong economic centers these days.

Energy stocks peaked in early April as crude reached its high of US$87.67 on the mideast war potential to expand with direct fighting between Israel and Iran. Prices retreated to US$72.48/b in early June as no escalation occurred and global inventories grew. It recovered thereafter to US$84.52/b on optimism of a strong summer driving season. We continue to believe that the weekly EIA storage data and China demand will be key to near term crude price action.

We remain concerned that the general market and the energy sector are vulnerable. A correction is in its early stages. The S&P/TSX Energy Index peaked at 308 in week two of April and is at 287 today (up four points from last week on the Middle East tensions). A close below June’s US$72.48/b for WTI should set up the last downphase and a breach of US$70/b.  We would then swing to bullish again and send out new SER Buy Recommendations.

Josef Schachter July 31st, 2024

Posted In: Schachter's Eye On Energy

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