September 19, 2024 | WTI Crude Bottom Is In Place But May Test Those Lows Over The Coming Weeks. BUY Energy Stocks When This Test Occurs

Fed day and then the Chairman’s press conference saw the announcement of an aggressive 50 BP decline in the Fed Funds rate to a range of 4.75 – 5.00%. This cut was hoped for by the markets so investors rejoiced and lifted the Dow by 125 points. We wonder if the Fed is seeing some disconcerting data on the horizon for this big decline versus the consensus of a 25 BP cut. In the release they expected to lower rates by an additional 50 BP in 2024 and 100 during 2025. The Q&A from today’s conference will get the market guru’s analyzing each word for some prescient additional directional forecast. Will there be a soft landing or stagflation like in the 1970’s? We need to see if inflation rises as we see more and more strikes (Boeing and the planned east coast dock workers) and if hiring weakens. The issue we will be watching is the supply chain challenges that occur from a lengthy dock strike.

Regarding energy, our WTI price target of US$66-69/b was reached last week and we sent out on September 10th, an SER Action BUY Alert on five companies from our Coverage List. We also reiterated BUYS on three names already on the Recommended List which had fallen to bargain levels. We expect a period of backing and filling for WTI crude in the coming weeks. As this test of the lows (US$66-68/b) occurs and we get one of our other two BUY signals triggered we plan to add additional BUY ideas. Subscribers please watch your emails on weak market days as this is when such an Action Alert would be issued. Today WTI is at US$70.73/b.

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Some of the recent global economic data points to consider are:

• The US Federal Budget Deficit for August rose to US$380B from US$244B in the prior month. It is quite clear that we will see a US$2B deficit this year. Interest payments alone will be over $1T which is greater than the next largest expenditure Defense.
• US Core PPI rose 0.3% in August, above the 0.2% forecast.
• Shelter costs in the US rose 0.5% in August, the fastest monthly gain since January. Shelter accounts for 70% of the core CPI gain in the last year.
• US Industrial Production rose 0.8% in August higher than the 0.2% forecast and the last read of -0.9%. Auto manufacturing helped to lift this number.
• US retail sales rose 0.1% in August, which was better than the forecast but was down materially from the 1.1% gain in July.

Summarizing – We surmise that the Fed is boxed in by their policy mistakes. Recession may now be here for consumers as consumers are spending less while still facing an onslaught of higher prices making household budgeting tighter. It appears that the spend is occurring via the use of credit cards. A number of the credit card companies are seeing higher delinquency rates as consumers try to keep up their standard of living on the back of added high cost debt. 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. From above you can see some positive economic data so the Fed needs to be careful on their messaging today.

Some of the recent global conflict data points to consider are:

• Ukraine fired missiles into Russia yesterday and destroyed a major ammo depot deep into Russia.
• Russia is now on the offensive in Sumy (Kursk Oblast) to throw out the Ukrainian invasion forces while at the same time moving to take over more of the Donbas region.
• Russia has warned NATO members that if their long range missiles strike deep into Russia it would “mean that NATO countries are directly at war with Russia”.
• Russia has warned that they would cut undersea internet access in Europe as retaliation for recent attacks into Russia with NATO equipment and the destruction of the NordStream pipeline. If this occurred it would impact the economies of the countries affected quite severely.
• China has deployed hundreds of new satellites in preparation for conflict with the US (Washington Times – September 17th). Some of these satellites are rumored to be able to kill other satellites. This could blind US forces in Asia if a conflict did arise over Taiwan.
• Israel has used its technology edge to have Hezbollah militants have their pagers and now walkie-talkies blow up, killing or maiming the militants. Over 2700 were wounded and nine were killed in the first attack (that of the pagers). Details of those impacted from the walkie-talkie attack are not known yet. The equipment built in Taiwan somehow got waylaid by Israel who hid explosive material in the communication equipment. How Israel’s intelligence agencies got into the Taiwan supply chain is unknown. Hezbollah moved to such equipment to evade Israeli location tracking of cell phones that was used to target and assassinate Hezbollah militants ordering the attacks against northern Israeli communities.
• Iran has provided the Houthis with advanced missiles. One was fired last week and evaded Israeli and American hi-tech radar. Fortunately it landed in an open area. How this occurred and what Iran has developed is now of concern.

Market Update:  We are watching the economic data carefully as it appears that consumers are tapped out and this seems to be dragging economies around the world 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.

We still expect that the Dow Jones Industrials will fall to the 36,000 level from 41,731 today.

Energy stocks peaked in early April of this year 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. The war fears have evaporated as we talked about and WTI crude has fallen below US$70/b to below US$66/b which was our downside target. From here we see some backing and filling. Investors should use this upcoming weakness to add to favourite energy positions or look at our SER recommendations for new ideas for your portfolios. Please check with your investment advisors to see what is appropriate for your portfolios.

Josef Schachter September 19th, 2024

Posted In: Schachter's Eye On Energy

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