August 28, 2024 | Crude Oil Retreats More Than US$5/b As War Premium Shrinks. WTI Breach Of US$70/b Likely In September

The war premium for crude oil has shrunk over US$5/b (from US$80.16/b in early August to US$74.80/b at our last look today) as only Iran’s proxies have attacked Israel and the US/Qatar/Egypt continue to discuss with Hamas a ceasefire and release of the remaining hostages (both dead and alive). President Biden and his surrogates continue to give the hopeful message that a deal will occur but there has been no corresponding positive response from Hamas. In the meantime the Houthis are attacking shipping in the Red Sea and Hezbollah continues sending missiles and drones into Israel. A major attack was planned with over 6000 armaments but Israel used over 100 airplanes to destroy the forward operating bases lessening the impact on the targets in the north and middle of Israel. Will the war widen? The last ditch diplomatic efforts to get a ceasefire and release of hostages will be the key to deescalating things further. Iran’s messaging is that they plan to attack Israel for the assassination in Tehran of a high official of Hamas but they also want to de-escalate tensions as their economy is in desperate shape. International airlines are canceling flights to the area and embassies are asking their citizens to leave the area.

In Europe, Ukraine surprised the world with its invasion of the Kursk area of Russia and taking over 500 square kilometers of land and over 100 towns and villages. By destroying three key bridges they have hampered the Russians from recovering the lands and pushing out the Ukrainian military. Some 12,000+ of the best Ukrainian units are making  this offensive possible. Among the manpower are over 3,000 foreign mercenaries from many countries but the bulk are from the US and the UK. In addition the newest and most lethal of NATO’s weaponry (main battle tanks, missile systems and F-16 fighters – some flown by foreign volunteers until Ukrainian pilots are fully trained up) has been seen on the battlefield. The Russians are furious and are calling the invasion a NATO one to gain support from their citizens and gain more enlistees to their military units. The US military contractors were hired from a group called ‘Forward Observation Group’. The Ukrainian Kursk military offensive is being declared stunning and may have reshaped the chance for a diplomatic solution. It is not going all Ukraine’s way as the Russians are bombing most of the energy infrastructure across the western part of Ukraine and continuing their successful land offensive in the western Donbas area of Pokrovsk, a major transportation hub.

Fed Chairman Powell at the annual central bankers conference in Jackson Hole set the stage for interest rates to be cut as he said ‘the time has come for policy to adjust’. The speed and size of rate cuts will be determined by the incoming data. The next FOMC meeting is on September 17-18 and the cut will be announced on the 18th with a press conference following thereafter. Fearless forecasters are throwing out cuts of 25-50 BP depending upon how the data comes out into the meeting. There will be one more job report and some inflation data. One major goof on the quality of the data was that the Labor Department revised the job growth from 2023 into early 2024 downward by 818K jobs. If they continue to lower data when they release the August data on September 6th then we may be already in the early stages of a recession and there would be rate cuts on the 18th of September and the next two meetings in 2024.

Some of the data we are seeing showing recessionary conditions:

For the US:

• Core Durable Goods orders fell 0.2% in July.
• The US Leading Economic Indicators fell again (down 0.6%) and is at the lowest level since the Covid lockdowns.
• Credit card delinquency rates are at the highest since 2012 with 11% of credit card balances now 90+ days delinquent. Credit card debt in the US now exceeds US$1.14T.
• Consumers in weak financial positions have been using ‘pay later loans’ and now can’t repay them.
• Poor Q2/24 results at Abercrombie & Fitch released today have carved the stock down 18% or down by nearly US$30 per share to US$137 per share.
• Even Warren Buffett is worried about the US economy and excessive valuations. He sold half of his Apple share and some of his large BankAmerica holdings. This added US$88B to lift his company’s war chest to an all time high of US$277B.
• The US dollar has weakened due to the expectation of lower interest rates and due to some energy producers planning to accept the Yuan for oil payments versus before where all transactions occurred in US dollars.

China:

• China’s youth unemployment has risen to a record 21.3%. There is an explosion in social unrest as this rate continues to soar. More strike action is now taking place and authorities are being heavy handed in keeping things under control.
• China diesel demand fell in June by 11%, the most in three years. Refinery output has fallen 6.1% from a year ago.
• Iron ore prices have plummeted to their lowest levels since 2022 as the steel industry in China is cutting output.
• China has overbuilt its capacity to build EV’s.  It now has a capacity of 40M vehicles yet sells only around 22M at home. They are looking to export the excess but are being blocked by more and more countries by tariffs so that dumping does not harm the domestic auto industries of targeted markets.
• The Chinese consumer is not spending as they are reeling from the real estate crisis and net worths have shrunk. China now wants export industries to grow but the targeted consumer nations already have large trade deficits with China. The US election on November 5th may lead to a new more painful trade war with China when the new administration takes power in January 2025.

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.  Recession may now be 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.

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. The AI stocks have been the leaders of investor enthusiasm but valuations are at record highs and any pricking of this asset bubble could cause a material stock market decline. We see the Dow Jones Industrials falling to the 36,000 level from 41,040 today. The AI area has been the leader in the market bubble and when bad news occurs that the market has not been expecting then those caught with problems get massacred. Today Super Micro Computer (SMCI) announced they were delaying their 10-K filing and the stock is down 27%, or US$148 to US$399 per share. OUCH!

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$71.46/b in mid-August as no escalation occurred and global inventories grew. If the war fears evaporate then a close below the recent low of US$71.46/b for WTI should set up the last downphase and a quick breach of US$70/b (bottom expected in the US$66-69/b area). We would then swing to bullish again and send out new SER Buy Recommendations.

Josef Schachter August 28th, 2024

Posted In: Schachter's Eye On Energy

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