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July 5, 2024 | US Commercial Stocks Fell Sharply Last Week Lifting WTI Prices. Exports Rose To 4.4 MB/D.

Josef Schachter

As a 40 year veteran of the Canadian Investment Management Industry, Josef Schachter has experienced several exceptional and turbulent global economic and stock market cycles. With his primary focus on the Energy Sector, Josef is able to weave global political, economic and monetary issues with current energy data into a compelling story of what's going on in the sector, what is to come, and why.

Politics is front and center as the debate last week showed President Biden is not up to the job now and definitely not for a second term. Even members of his own party are disillusioned and are looking for someone to grab the baton at the August Democratic convention (August 19-22). Elections in the UK and France add to the focus of the news cycle. Parties in power are facing rebuke around the world. In Canada, our Prime Minister is uncomfortable coming to the Calgary Stampede as he knows how unpopular he is. Skipping this event is a first for him since becoming Prime Minister.

The first hurricane of 2024 has roared towards the US after devastating the southeast Caribbean. Hurricane Beryl reached a Category 5 strength the first time this early in the season. Weather forecasters are worried about a severe season. If this Hurricane moves into the Gulf of Mexico it could force the shut in of producing oil and gas fields as well as coastal refineries. Crude has gained US$4/b to US$82.85/b over the last week. Adding to upside pressure is the increasing concern that Israel and Lebanon’s Hezbollah may enter a full out war. This would have Israel fighting a two front war with Hezbollah a much tougher opponent than Hamas.

Mixed economic data continues to sway North American markets as each data piece is scrutinized for signs of the health of the economies. It is clear that the consumer is having a tougher time and that overall manufacturing is slower than last year. What is holding the two economies up is government deficit spending.

Data of note:

  • Canadian manufacturing softened for the 14th straight month. New orders declined and for the first time in five months firms cut jobs.
  • US Consumer Confidence fell again as sentiment was more cautious due to the higher cost of living, higher borrowing costs, and some softening in the labor market. Restaurants are closing, trucking and logistics companies are shutting their doors. Levi Strauss saw its stock fall 15% last week after revenues came in below forecast for the second fiscal quarter.  Walgreens Boots fell over 22% last week as it announced the closure of 25% of its underperforming stores. It is the largest pharmacy chain and had around 8,600 stores and 300,000 employees before this announcement.
  • Core Durable Goods Orders in the US fell 0.1% in May.
  • The Fed’s key inflation indicator showed a rise of 2.6% in May from a year ago. This was taken positively and hopes rose that the Fed would move quicker to lower rates. One cut is now in the forecast. This optimism may prove wanting as the biggest help to the number was lower crude oil and product prices which are now rising as summer peak demand is starting.
  • China announced yesterday that its factory activity shrank for a second month.

Summarizing – We surmise that the Fed is boxed in by their own 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 persists and goes higher in the coming months, some FOMC voting members have indicated that they may want to raise 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 may be 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:

  • Lebanon’s Hezbollah backed by Iran has used precise missiles against Israel’s north that can hit all of Israel. It is now gearing up for all out war with Israel. Israel is moving troops from Gaza to be rearmed and then sent to the north to prepare for any offensive on that border. The Israelis have warned that they would even attack Beirut if the war widened. They have intelligence that this airport is where Hezbollah has its major weapons storage. Over 100,000 fresh Israeli soldiers are being prepared for the plan to knock out Hezbollah for good. Great plan – however they have not succeeded in doing this to Hamas and Hezbolllah has more troops and the latest Iranian weapons. There are reports that Israel may not have sufficient munitions if this is a prolonged war.
  • The US wants to restrain Israel from invading Lebanon and widening the war in the Middle East. Netanyahu has blasted President Biden and the White House has lashed back. The US has restricted sending 2,000 pound bunker busting bombs out of concern Israel is using them in Rafah and endangering civilians.
  • China has seen more naval challenges in the Spratly Islands against the Philippine navy. More saber rattling in this contested area that may have significant energy reserves. China is building the world’s largest nuclear arsenal increasing its stockpile from 410 to 500, according to the Stockholm International Peace Institute.
  • China and Russia are developing large numbers of attack drones based on Iranian models. European officials are worried that this may be a sign that Beijing is moving closer to providing direct lethal aid to Russia.
  • Ukraine will be getting more air defense missiles (Patriot air defense systems) from the US to protect Kiev and Kharkiv. The US is redirecting this aid from other allied countries. Such armaments are in high demand yet the manufacturing of these weapons is difficult due to supply chain and limits to the western defense industrial base.
  • Russia is gearing up for a new offensive in eastern Ukraine. It has built a new railroad to handle the logistics needed for the offensive in the Zaporizhzhya region.
  • Russia is very annoyed that the US used its satellites to guide long range ATACMS missiles that hit Crimea last week. They blame the attack on the US which provided the targeting information. US use of spy drones in the Black Sea is another irritant and shows how close the two superpowers are to a direct confrontation.

Market Update:  We are watching the economic data carefully as it appears that consumers are getting tapped out and this could drag down the economy. The offset is the 6% US 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/b on optimism of a strong summer driving season. We continue to believe that the weekly EIA storage data will be key to near term crude price action.

We remain concerned that the general market and the energy sector are vulnerable. The market is getting narrower and narrower as the AI stocks continue to take markets higher but the underlying market is deteriorating. A correction may be in its early stages. The S&P/TSX Energy Index peaked at 308 in week two of April and has fallen to 290 today. It has risen over 15 points over the last two weeks as crude has rebounded.

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July 5th, 2024

Posted In: Schachter's Eye On Energy

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