Another day on the roller coaster found US equities logging eye-watering gains amid oil’s worst session in months, underscoring the combustible setup outlined here on Wednesday morning.
Crude tumbled some 12% (figure below), putting the brakes on a torrid run that pushed Brent near all-time highs earlier this week. Losses, which at one point reached 17%, were exacerbated by the UAE, whose ambassador to Washington said OPEC+ should “consider higher production levels.” “We favor production increases,” Yousef al-Otaiba remarked, in a statement carried by the Financial Times.
The UAE didn’t consult with the rest of OPEC before commenting. Needless to say, there’s no guarantee the cartel will reach a deal to open the taps further. The alliance has adhered stubbornly to a gradualist approach for months, frustrating the Biden administration and compelling an SPR release late last year. If the situation does deteriorate into a public disagreement, it wouldn’t be the first time a rift between the UAE and the Saudis threatened the fractious alliance.
Crude price predictions are all over the place. Some see demand destruction setting in sooner rather than later, while others suggest prices could rise near $250 per barrel.
“The uncertainty on how this conflict and oil shortages will be resolved is unprecedented,” Goldman’s Damien Courvalin said earlier this week, in a note detailing a trio of scenarios “ranging from a resumption in exports in the coming months to a sustained two-thirds reduction of Russian seaborne” shipments. “Even assuming SPR and OPEC supply relief, these point to oil prices ranging from $115/bbl to $175/bbl in 2022,” the bank said, raising their 2022 spot Brent forecast to $135.
“The need to secure alternative supply is heightened by the fact that self-sanctioning is already underway and could last indefinitely, regardless of the decision on coordinated sanctions,” Deutsche Bank’s Michael Hsueh wrote, in a March 8 note.
“The owners of the most readily deployable spare capacity, Saudi Arabia and the UAE, have expressed little eagerness to comply in the past week,” Hsueh went on to say, referencing the table (above). The UAE seems to be coming around. Mohammed Bin Salman is another story, though.
Meanwhile, Russia and Ukraine preemptively assigned blame for future gas disruptions in Europe. The Russian military now controls two key pumping stations, a scenario Moscow suggested is somehow a good thing. The Russian Energy Ministry said the Kremlin can guarantee those flows, but outside of that, prospective disruptions would be Ukraine’s fault. Sergiy Makogon, chief of Ukraine’s gas transmission operator, stated the obvious in a phone call with Bloomberg. “This area should be demilitarized,” he said. “We can’t assure the operations if we don’t have control.” So far, flows are uninterrupted.
At this point, most market observers are likely aware of how the numbers break down, but just in case, about 25% of Europe’s energy mix comes from natural gas. Italy and the UK are particularly dependent (figure on the left, below, from Goldman).
Germany and Italy stand out for their dependence on Russian supply (figure on the right). “While Russia has curtailed its gas flows to North-Western Europe since September last year, flows have not been further reduced since the onset of the war,” Goldman’s Christian Schnittker said, adding that flows have actually increased recently as spot prices rose.
“But the risk of further geopolitical escalation paired with close to historically low gas storage levels could lead to production shutdowns, either because of a physical lack of gas or because production is unprofitable given high spot gas prices,” Schnittker went on to remark. Europe didn’t participate in the US-UK joint ban on Russian crude.
In addition to the reprieve on crude prices, market sentiment was bolstered Wednesday by comments from Volodymyr Zelenskiy, who told Bild some manner of compromise is possible to end the war. He was keen to emphasize that Russia needs to compromise too. Only direct talks between himself and Vladimir Putin can end the conflict, he said. Zelenskiy’s remarks played a role in pressuring crude prices.
US equities ultimately logged their best day since June of 2020 (figure on the left, below). On Wednesday morning, I cited Nomura’s Charlie McElligott in suggesting a squeeze might be imminent in the event oil were to tumble. That’s precisely what happened.
In a separate, pre-dawn article, I flagged an absurd rally in German shares. That move accelerated. The DAX rose an incredible 8% on Wednesday (figure on the right).
All of this speaks (loudly) to my steadfast contention that equities (and commodities too) are simply broken right now. There’s nothing to divine from this kind of price action. Entertaining though it may be.
“All of this speaks (loudly) to my steadfast contention that equities (and commodities too) are simply broken right now. There’s nothing to divine from this kind of price action. Entertaining though it may be.”
Spot on, sir.
Many of us deride the “gamification” of retail investing, thanks to Robin Hood & Redditt. But what’s the difference between them and the Risk Parity/vol control funds and many other CTA algos?
@derek: Your last paragraph more less succinctly sums up a theory and proof 😉 that got so long it blew up the comment box before I could share it with an indifferent World. It was so long the Unibomber would of been impressed! The gist of it, or at least the last line before the page locked up, amounted to a speculation that the Financial Industry’s ‘protection racket’ niche ‘customers’ (I’d say suckers but that is not the fish I have in mind), which are good for billions every month, are managed in very much the same way as ocean fisheries. Where the objective is not to over fish and so deplete the resource, but, rather to husband the schools such that a reliable haul can be harvested quarter after quarter indefinitely while simultaneously growing the schools to the maximum amount the environmental inputs can sustain.
Yesterday: bought Europe, sold US. Today: ditto. Tomorrow: predict ditto.
When war ends, Fed will still be on the tightening path and Congress – specifically, Joe Manchin, since he decides what Congress does – on the spend-nothing path, because the US will have “suffered” little more than $5 gasoline.
The ECB was not on the tightening path pre-war; who thinks it will decide to take that path post-war? The EU was starting to spend its EUR 700BN pandemic stimulus bond funds pre-war; who thinks it won’t add a EUR X000BN energy independence bond and a EURX000BN defense budget increase to that spending spree?
@jyl: “bought Europe, sold US” not very helpful. Next time try throwing up the main tickers you are speculating on and readers might be able to come back with more useful replies. Europe is a big place, thanks to the promiscuous nature of the EU and NATO membership standards. The effect of which is magnified by Russia’s counterposing repulsiveness.
I had to laugh when I saw DAX up 3/09, because hours before I’d read a piece from a ‘technical analysis’ datadopers chartist service I subscribe to for a month or two during “interesting times” for laughs now and then, advising how the tea leaves were forecasting DAX was going down for blah and then some more blah reasons.
Random quote from something I read a few minutes ago:
“Morgan Stanley’s global head of emerging-market sovereign credit strategy wrote in a research note this week that Russia could default as soon as April 15, when the 30-day grace period on a $107 million bond interest payment expires. Two more bond payments worth $359 million and $2 billion are due March 31 and April 4, respectively, with 30-day extensions, according to Reuters.
Russia’s majority state-owned gas giant Gazprom has a $1.3 billion bond payment due March 7.
A Russian default could shake the economies of developing market countries — favored by some lenders for their high-yield upside — so profoundly that investors could ditch those venues in favor of safer bets, experts say. That would flood Western markets with capital pulled out of China, India, Brazil and eastern European economies, fueling even higher price inflation.”
The first two paragraphs are potentially useful enough information to consider potentially actionable fodder if confirmed in these foggy times by alternative sources. Of course, you’d also have follow them for changes and verify their actual occurrences if your bets are of a sufficient portion of your portfolio to merit monitoring with such care. The third paragraph is exactly the sort of Noise masquerading as value-added Signal we’d all be better off having never heard or seen. Dubious chatter projecting out to what may as well be an eternity about impacts to “eastern European economies.” Whatever the hell that means. The, “experts say”, is an especially egregious example of an this-guy-does-know-his-asshole-from-a-hole-in-the-ground-but-if-he-can-just-tack-on-a-few-more-words-the-editor-will-be-satisfied-ism. Either that, or, it’s an example of an he-has-know-idea-what-that-expert-just-said-but-it-sort-of-sounded-like-this-ism. So other than giving a sort of pertinent example why knowing the ticker symbol could help a reader narrow down the country/region risk you are taking why post the quote? I guess, because the cross contamination of credit and equities still has been pretty subdued despite an onslaught of headlines that would have done some pretty serious damage in the days before the advent of ‘administered markets.’ Since, I’m not at all clear on cut and paste etiquette legalities or even norms for THR I’ll just say it is from a rag owned by Jeff Bezoars.
I found this Twitter post interesting, just sharing:
“Patrick Krizan @PatrickKrizan·Mar 7
In the #Eurozone, with oil at 120EUR, tipping point from supply shock into demand slowdown is near. Curve slope/Oil price ratio is close to inversion. In #Germany since 1980s, not every recession was preceded by inversion, but every inversion was followed by a #recession #ECB””
If I ever design a roller coaster ride I’ll use your third paragraph for inspiration. There won’t be an empty stomach left by the time that ride ends. The poor carnies will have to don wetsuits and scuba masks to work it.