July 25, 2024 | WTI Falls >US$4/b Over The Last Week To US$77.30/b On Weakening China Demand

The ending of President Biden’s candidacy for a second four year term has emboldened the Democrats that they could win the Presidency and end the worry of a clean sweep (Presidency, House and Senate) by the Trumpers. By endorsing Kamala Harris, Biden passes the torch to his VP and ensures that the campaign funds raised by the party go to her. The joy of her speedy party establishment endorsements also led to raising US$100M in campaign funds in just a few days. This was a record for any political candidate or party. This love could last past the Democratic convention to be held August 19-22 in Chicago. Who Kamala chooses for VP will be very critical as four mid-west states have historically decided Presidential elections. After the September long weekend the knives will come out and the election battle will get very nasty and ‘UNITY” which both parties have called for will disappear in the political knife fights. TV ads will get nastier and the fact checkers will have their workdays much longer.

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

• The assassination attempt against former President Trump and the Secret Service now saying they cannot protect him at his large outdoor events. They want him to just have indoor events.
• A large global IT failure from a company being paid to prevent IT interruptions is still being resolved.
• Russia and China having naval war exercises near Alaska in international waters means that the US navy is stretched to a new area to protect US interests.

On the earnings side many of the Magnificent 7 have not shown the robust results expected and the weak consumer has affected many other entities. Some of the recent negative results include:

• TESLA shares are down 12% today after an earnings miss last night. Revenue from cars fell for the second straight quarter (or down 7% this quarter). Net income fell 45% in the quarter from the prior year.
• Ryanair shares fell 11% as the airline reported a 46% decline in quarterly profit as lower capacity and lower fares hit them across their system.
• CrowdStrike fell over 11% as the major outage from their cybersecurity product rippled across global businesses. The worst hit were airlines, banks and health services.
• UPS fell 12% as it missed profit estimates (down 30%) and lowered its guidance as parcel traffic fell off sharply.

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:

• Canada’s data has been weaker than the US and the Bank of Canada lowered its key rate by another 25 BP to 4.5%. Watch the C$ weaken as the spreads between the US and Canada widen. Retail Sales in Canada fell 1.3% in May versus a forecast of a decline of 0.5%.
• A US Manufacturing recession is here as the data continues to decline.
• US Existing Home Sales fell 5.4% in June to the lowest pace since 2010.
• US Job Postings fell 12.4% year over year.
• The US Debt to GDP has risen to 116% and is nearing the record high of 120% seen during WWII.
• US Bond auctions are not being received as easily as before given the large amount of funding.
• Copper prices have backed off to a 3-month low on weaker China demand.
• China made a rate cut to support the economy but this seems to do little to change the deflationary pressures and rejuvenate the housing market.
• China imports of crude have contracted in April and May versus the prior year. This has added to downside pressure on crude.

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 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:

• China held military exercises with Russia offshore of Alaska in international waters. They are also doing the same around the Philippines as they expand their military working relationship.
• Israel continues to go after Hamas leadership and Palestinian civilians have seen rising casualties. Biden wants to get a peace deal done before the US election but some of the deal aspects are abhorrent to Israel.
• Israel attacked the Yemeni port of Hodeida and destroyed fuel storage facilities, attacked oil fields and a power plant after Houthis sent drones to Tel Aviv that killed one person and wounded eight others. This long range air attack also was done to show Iran that it had the capability to attack a large portion of their country. This port was important to the Yemense as it handled 70% of the country’s imports.
• Europe turns to conscription as they fear a wider war with Russia. Scandinavia and the Baltics have reintroduced conscription. Failure to enlist can result in fines or jail time.
• On the battlefield Ukraine is giving ground to Russian forces but are making Russia take severe losses in manpower and equipment.

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 283 today (down five points from last week). A close below 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 25th, 2024

Posted In: Schachter's Eye On Energy

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