December 31, 2024 | Next Decline In Crude Prices Below US$68/b Should Trigger A New Long Term BUY Signal For The Sector

The Biden administration is leaving in three weeks and they continue to spend all the funds authorized by Congress and that the President can spend under Presidential authority. The result may be that the incoming administration comes in with a run rate of a US$3T+ deficit and all Biden’s favourite programs (climate, more government hiring etc.) seeing all getting more funds to spend making it harder for the new administration to see the policies that they were elected on being implemented. If the goal of the Biden administration was to leave the new administration with geopolitical, financial and economic challenges they have succeeded. It is unlikely that the people’s business will be done in the next few months as political drama unfortunately wins the stage. This transition seems to be one of the worst ever as White House staffers do everything they can to make the start of Trump’s Presidency difficult.

President Trump will likely focus initially on the border crisis and boosting US energy production, while his DOGE team gets a handle on government waste. This while the President’s key cabinet and other lieutenants go through the Senate confirmation process. It is unlikely that any major action will occur in the Congress as the first battle is electing the Republican Speaker of the House which may not be an easy vote. With a slim majority even a few votes against current Speaker Johnston could derail Trump’s goal of massive changes in his first 100 days. One victory for incoming President Trump was getting a court halting Biden’s sale of 11,000 bollards used to build the border wall. If not achieved this would have delayed work on adding to the border wall and border security.

Treasury Secretary Yellin has added to the incoming administration woes by using up the remaining Treasury cash on Biden programs so that the debt level hits the limit in January. This would force either a government shutdown or a deal that gives Democrats lots of their policy interests (i.e. pork spending) that differ from Trump’s spending priorities. A period of political strife is not what the markets are expecting in January. One more problem for the incoming administration is that financing of the debt maturities (nearly US$10T in 2025) will occur at rates over 4.5% compared to their  funding rate of 2.5%, on an average basis. Add in a large 2025 deficit of US$3T and that is why we are seeing long term US interest rates rising while short term interest rates are declining.

On the geopolitical front a deal to end the hostage crisis in Gaza and the war in Ukraine may take a back burner as Trump’s team tries to take over the levers of power in Washington. The anti-Trump bureaucracy may take time to weed out or be forced to implement the new adminstration’s policies that they were elected on. Expect the Democratic Congress to be difficult to work with as they are abhorrent to shrinking the size of government or any of its programs or perks.

In our upcoming first SER issue of 2025 to come out on January 16th we plan to cover the following topics which may impact the investment markets. If these are of interest to you, become a subscriber.

• Inflation may be re-igniting. Food costs led by eggs due to the flu disease as well as ranchers culling herds due to poor economics will lead to much higher food inflation in coming months.
• The US will likely hit its debt ceiling in January forcing either a government shut down or an agreement with Congress that delays Trump’s extension of the tax cuts and slows his shrinking of the bloated government employment levels or requiring all government workers to go back to the office and ending Covid’s remote working.
• Job openings are shrinking so this may be a predecessor of recession. We saw this in 2001 and 2019 and recessions occurred thereafter.
• US long term Treasury yields have lifted nearly 50 BP despite the Fed lowering its short term Fed Funds rate. The 10-year yield has lifted to 4.58% (December 31) from 4.13% in early December. What is happening? Has crowding out started?
• Both the Bank of England and the US Fed are so worried about another round of bank failures that they are not releasing their moves until after the failed bank has been resolved. They did not do this in 2008 – 2009.
• Will Trump’s Tariffs hurt or help the US economy and what impact will that have on the rest of the world.
• The US Dollar has been very strong since late September rising from 99.86 to 108.29 last week. What is in store for the US Dollar in 2025?
• Many countries are facing budgetary crises and are seeing rates rise sharply. Why we may see a Sovereign debt crisis in 2025 which will result in a rush to hide in a safe place – that being the US.
• President Elect Trump is calling for ‘drill baby drill’ but also for gasoline prices at the pump to be cut in half. Why this is hyperbole and not realistic.
• Why we see commodities being a big winning part of the markets in 2025 and energy (especially crude oil) will be the largest contributor to this upside. We were cautious in 2024 and now we are again against the consensus.

Geopolitical Military Issues:

Ukraine/Russia – Russia Moves Aggressively before January 20th

Russia is speeding its attacks against Ukraine’s forces that invaded Kursk. Putin wants to expel the invaders before January 20th. It would give him more bargaining power when President Trump pushes for a diplomatic solution. Ukraine is sending in more forces to make this difficult but from the battlefield they have lost over half of their initial invasion land capture. Large concentrations of Russian and North Korean forces are driving the land recovery operation. From reports over 1,100 North Korean troops have been killed so far in this offensive. North Korea is sending Russia more military manpower, ammunition, rocket launchers, suicide drones and self-propelled artillery to aid Russia as their relationship expands. North Korea is gaining modern warfare experience, food aid, crude oil, advanced space technologies and money from Russia. North Korea’s military industrial complex is running flat out to supply Russia with needed munitions and equipment.

Russia has escalated its attacks on Ukraine’s energy infrastructure, major cities (Kiev today) and military bases as it works to gain leverage when diplomatic efforts commence in late January. Over 50% of Ukrainians were without power after these attacks. Russia has recently severed a key undersea power cable between Finland and Estonia as it goes after those countries supporting Ukraine but in an indirect manner so as not to start WWIII.

Israel versus Iran Proxies

Israel has ramped up attacks against Houthis that fired missiles into southern Israel. They hit two power stations and the air bases for drones at the main airport. Iran still seems to find supporters willing to attack Israel on their behalf. At some point Israel may go after the IRGC military bases and assets in Iran to warn them to stop aiding their nearly wiped out proxies. Somehow Hamas is still able to fire missiles into Israel despite the decapitation of their leadership and destruction of their brigades.

Regarding energy,

Our WTI price target of US$66-69/b was reached in September and is likely to do so again in the coming weeks. Today WTI is at US$71.80/b. We expect a period of backing and filling for WTI crude in the coming weeks and another test of the lows (US$66-68/b). When 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.

Josef Schachter December 31st, 2024

Posted In: Schachter's Eye On Energy

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