Friday, March 11, 2022

The New Oil Dynamic

 

By Alex Eule |  Friday, March 11

First, the Bad News. The week ended just like it began, with fear pervading the world -- and markets. U.S. stocks gave back an early morning rally, with every index -- and every sector -- finishing the day in negative territory.

Stocks have now fallen for two consecutive days following Wednesday's big gains. The relief rally wasn't enough to save the week. The Dow Jones Industrial Average, down 2% on the week, has fallen for five consecutive weeks. The S&P 500 (-2.9%) and the Nasdaq Composite (-3.5%) are down for two straight weeks. 

Today, there was no place to hide. Energy stocks lost steam even as crude oil gained 3%, with the Energy Select Sector SPDR exchange-traded fund down 0.8% on the day.  At $109 a barrel, crude still finished down 5.5% on the week, while the energy sector gained 6%. 

The dynamics between oil prices and oil production have shifted, Avi Salzman writes in this weekend's Barron's. It's no longer just a case of higher prices bringing more drilling: 

Russia may see an opportunity to weaponize a global oil shortage, warning adversaries that $300-a-barrel oil is coming if they don’t back down on sanctions. Yet investors and financiers are telling oil and gas producers not to pump more and to slow down and stay within their budgets. Investing in shale drilling had been a losing bet for a decade because of overproduction. Drillers just figured out how to restrain themselves, and the stocks are finally winning.

And replacing lost Russian oil won't be simple, even if U.S. and European producers were willing partners. 

Right now, however, the U.S. and Europe cannot match Russia barrel for barrel. Capital budgets would have to quadruple by the end of 2024 for shale to replace Russian oil and gas exports to continental Europe, the United Kingdom, and the U.S., according to Wells Fargo. Analysts see no conceivable scenario where that happens.

... The U.S. Energy Information Administration has forecast that U.S. operators can add 760,000 daily barrels this year, or about a sixth of Russia’s global exports.

So that brings us back to the question of how high oil can go -- and whether elevated energy prices could stomp out the post-Covid recovery, even potentially triggering a recession.  

"With the whole world at the mercy of Mad Vlad, the pandemic now seems like a walk in the park," Ed Yardeni, the usually bullish investment strategist, wrote this week. "A recession can no longer be ruled out. For stock investors, we think 2022 will continue to be one of this bull market’s toughest years."

Avi's story offers some good news on the energy front, at least: "One major reason the U.S. isn’t already in recession is that Americans spend half as much of their budgets on energy as they did in the early 1980s."

And one more piece of good news: The market is not yet sold on ever-increasing oil prices. Nicholas Jasinski notes in his latest Barron's magazine story that futures pricing still implies year-end oil at $88 a barrel, down nearly 20% from current prices. 

For more on the rapidly changing world order, make sure to check out this weekend's Barron's. The full issue will soon be live here.

Watch our weekly TV show on Fox Business Saturdays at 10 a.m. or 11:30 a.m. Eastern time; or Sundays at 10 a.m. or 11:30 a.m. ET. This week, insights from cybersecurity expert Christopher Krebs on threats tied to the war in Ukraine.

 

 


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