October 17, 2024 | WTI Drops US$8/b Over Last Week As Israel Agrees Not To Attack Iran’s Nuclear Or Energy Facilities

Military tensions are picking up around the world and any miscalculation could expand the war fronts. It is not just the Middle East and Ukraine. China and North Korea are flexing their military muscles and worrying their neighbors.

US pressure on Israel has succeeded in getting the IDF to agree not to attack Iran’s nuclear or energy infrastructure. In return, the US will provide new long range ballistic missile interceptors ‘Thaad systems’ and US military personnel to operate the equipment in Israel. The interceptors will be used if Iran makes another mass missile and drone attack into Israel. The markets liked this news that Iran’s energy facilities would not be destroyed and production will not be impacted so crude prices eased from their expanded war premium levels (from US$78.46/b more than a week ago to US$70.58/b at yesterday’s close). So now expectations are that Israel will attack and degrade IRGC military infrastructure, missile bases and ammunition depots when they decide to retaliate for the last 200 missiles fired at Israel. Israel’s cyber warriors hit Iran’s nuclear, government, ports and infrastructure sectors on October 12th as part of their retaliatory measures.

The US is getting worried that Iran is close to having weapons grade uranium and is close to making the fuel into bombs. The US may be late in this view as Iran undertook its first underground  nuclear test last week according to EuroNews. The firebrands in Iran are calling for strong military force against Israel and this action is being led by Hassan Khomeini the grandson of Iran’s first Supreme Leader.

Hezbollah has been very busy attacking Israel daily including 300 rockets on Yom Kippur. A retirement home was hit in Herzliya. A deadly drone attack on a Golani training base was the worst of this strike. Over 60 were injured and four Israeli soldiers were killed. In retaliation, Israel attacked Hezbollah bases and they suffered significant personnel losses. Lebanese civilians were warned by the IDF to move north so that Israel could destroy Hezbollah’s offensive capacity close to the Israeli border.

Turbulent markets in China headline each day the challenges China is having to get its economy back on track for sustainable growth. It needs to write-off debt challenged fixed assets, move from an export economy to a consumer economy and stabilize government owned businesses. Recently it has increased its pressure on Taiwan and on Monday deployed a record 125 warplanes and its Liaoning aircraft carrier on a large-scale military drill around the island, increasing tensions in the area.

North Korea has been saber rattling with South Korea and tensions on the border are elevated and military units are on alert. Leader Kim is annoyed that South Korea flew drones over his capital Pyongyang and in retaliation blew up sections of roads and rail routes that had linked the two countries. In support of Russia, North Korea has deployed some combat soldiers alongside Russian troops in the Donetsk region to help Russia target Ukraine with North Korean built ballistic missiles. More ammunition is flowing into the area by North Korea as the alliance with Russia expands. There have been rumors that North Korea is planning to send a few army brigades to the front so that their personnel can learn from Russia about tactics and fighting skills. Ukraine has foreign mercenaries fighting against Russia and now Russia is accessing the massive army of North Korea. If true this increases the chance of direct fighting between Russia and its ally and NATO forces in the region.

On the economic side, the following new data points were released over the last week.

• The Eurozone manufacturing PMI fell to 45, signaling a significant contraction in the manufacturing sector and was the lowest reading since the pandemic.
• Core US CPI rose 0.3% versus the 0.2% forecast. Core PPI came in at a modest 0.2% reaching the Fed’s target.
• Canada added 46,700 jobs in September (above consensus) and the rate fell to 6.5%.
• China had weak exports as the US and the EU added tariffs on China made EV’s and other products. Overall, China exports rose only 2.4% in September.
• We have been concerned about the overvalued AI chip stocks and we got two more data points that competition is heating up. The first is that AMD has launched a new AI chip to compete against Nvidia’s ‘Blackwell’ chip with its own chip, the ‘Instinct MI325X’ chip that will be available in early 2025. The 90% margins that Nvidia has been making are likely to come under pressure as AMD’s chip supply ramps up. The second is that semiconductor equipment maker ASML noted in its earnings release yesterday that demand and sales outlook were disappointing. The stock fell 16% yesterday to US$730 per share, down US$142 per share on the day.

The Fed’ s next meeting is on November 6-7, and is expected to have a cut of only 25 BP due to recent strong data. Some Fed watchers are noting that any further strong data could mean they pass on any change at this next meeting.

Regarding energy, our 2H/24 WTI price target of US$66-69/b was reached once and is likely to do so again. When we got the first decline it  triggered a BUY signal and we sent out an SER Action BUY Alert on September 10th of 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 and another test of the recent lows (US$66-68/b). If this occurs we should see another BUY signal triggered. We plan to add additional BUY ideas at that time. Subscribers please watch your emails on weak market days as this is when such an Action Alert would be issued. Many of the ideas currently on our SER BUY List will be presenting at the 2024 ‘Catch The Energy’ Conference. We hope you will be able to attend.

Josef Schachter October 17th, 2024

Posted In: Schachter's Eye On Energy

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