High Oil Price

Date: Sept 24

Uninterrupted rise in oil prices has pushed benchmark BRENT CRUDE CLOSE TO $100 a barrel.

Reason

Saudi Arabia and Russia’s decision to reduce supplies (these two countries are in solid control of the oil market). There is concern that this may be extended even further while the possibility of further production cut as well has not been ruled out. Putin last week banned all Russian diesel exports.

Background

The oil demand for China has remained at record-breaking levels.

Why and Impact

Why Saudi Arabia to do this

1. Higher price to support its ambitious and expensive economic and social reform program (sought to bolster prices to fund a planned transformation of its oil-dependent economy).
2. Renewable energy sources and electric cars promote become a long-term threat to their economic security.

Why Russia

1. Depends on energy income to finance its war on Ukraine.

What US Action

1. Current Action from White House: more restrained in public response, why? Because the Biden administration is trying to:
   • Convince Saudi Arabia to normalize ties with Israel.
   • Retain influence over Saudi Arabia when Saudi Arabia comes close to a relationship in these recent days.
2. Current Situation: Crude inventories fell by 2.1 million barrels last week.
3. US oil and gas producer: standing up new drilling rigs at the fastest rate since last November.

Influence

• Pose challenge to central banks’ ability to bring inflation under control (US and UK). High oil prices prop up price pressures while slowing the economy.
• For US:
  • US election - oil price increase become one of the topics for the Republican candidates to attack the Biden administration.
• For Global: High-interest rate, oil price increase with dollar strength, it may increase the possibility of recession. High-interest rate will also cause high housing cost.
• UK, US, Canada, India elections - will they can stop inflation?

How the Market React

1. The S&P 500 energy sector has risen nearly 15% over that period, doubled the next-best performance sector?
   • Contradiction: the trending between crude oil contract with S&P 500 oil and gas ETF is broken. Since Sept. 8, when Brent crude closed above $90 a barrel, oil prices have risen by another 2.6%, while an index of oil producers has declined 5.3%.
2. Oil futures.
3. In the fourth quarter, it is expected that higher output in North and Latin America will bring global production and demand more into balance.
4. Oil-intensive companies such as airlines: rising prices will eat into profit.
5. Consumer Behavior:
   • Consumer will be forced to reduce driving. In June and July 2022, when Brent crude prices averaged roughly 110 USD a barrel, gasoline demand in the U.S. — the biggest consumer of oil — fell 4.1% compared with the same period a year earlier when prices had a $70 handle.
   • Consumers would like to save more.

Perspective

The recent surge in oil prices, with the possibility of Brent crude surpassing $100 a barrel, has instigated notable transformations in the market landscape.

Elevated oil prices may provoke shifts in consumer behavior, especially in the United States. Consumers might opt to scale back their driving habits and redirect resources towards savings.

Furthermore, developing nations, such as China, confront a heightened susceptibility to reduced fuel consumption. As oil prices surge alongside a robust U.S. dollar, economies reliant on dollar-denominated oil purchases face potential turbulence, imperiling their economic stability.

Conclusively, industries heavily dependent on oil, like airlines, could confront profit erosion due to rising oil prices, inflating operational expenditures. This could culminate in elevated ticket prices for travelers.

Personally, I would consider taking long positions in companies specializing in renewable energy or clean energy ETFs. Because escalating oil prices are fostering a shift towards cleaner energy alternatives. Additionally, to hedge against the potential inflationary effects of higher oil prices, it might invest in assets like Treasury Inflation-Protected Securities (TIPS).

Furthermore, I would contemplate opening short positions or acquiring put options for companies associated with the airline and transportation sectors as these industries could face profit pressures due to high oil prices.

Reference

• WSJ - The Fed’s Next Challenge: $100 Oil
• WSJ - Oil at $100 Is Too High, Even for Energy Companies
• Reuters - Oil Prices Rise Concerns Over Tightening Supply
• FT - Article on Oil Prices

finance — Jan 26, 2024