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Wednesday, November 30, 2022

The Factor That’s Onerous About Markets

When Russia invaded Ukraine in late-February, the worth of oil was a bit greater than $90 a barrel.

It principally went straight up from there to properly over $120 a barrel in a couple of week and a half.

Fuel costs rapidly moved up as properly, getting as excessive as greater than $5 a gallon by early summertime.

The vitality image felt bleak on the time and it appeared prefer it was solely a matter of time till we broke via all-time highs in vitality costs.

Simply take a look at the entire headlines from March of this yr:

We spent the whole lot of the 2010s underinvesting in our vitality infrastructure after which one of the crucial essential vitality sources on this planet principally received lower off due to the warfare.

Issues felt bleak contemplating inflation was already on the highest ranges in 4 a long time.

I particularly recall listening to an Odd Tons podcast in March that laid out the case for $200/barrel oil in March when tensions have been excessive:

Tracy: I imply, how excessive do you assume it may go? And what stage could be worrying to you by way of demand destruction?

Pierre: Properly, I believe, like near $200 a barrel — a lot greater than right this moment. I really feel like there’s no demand destruction at $110 a barrel and we’ll need to go considerably greater earlier than demand can go down by sufficient. However that’s additionally assuming there’s no authorities mandate and a few type of confinement, the place let’s say two days a month, we aren’t doing something. And we’re in confinement for 2 days a month. I imply, there may very well be some options like that to convey demand down, but when there’s no authorities mandate, then I believe that round $200 oil can be sufficient to convey demand to steadiness the market.

Joe: May we see $200 oil this yr?

Pierre: Sure, I believe so. Sure.

It certain felt prefer it was solely a matter of time.

Nonetheless, the other occurred.

Oil costs have crashed from these March highs.

Right here’s a narrative from Reuters this week about the place issues stand:

Oil costs fell near their lowest this yr on Monday as avenue protests in opposition to strict COVID-19 curbs in China, the world’s largest crude importer, stoked concern over the outlook for gas demand.

Brent crude dropped by $2.67, or 3.1%, to commerce at $80.96 a barrel at 1330 GMT, having dived greater than 3% to $80.61 earlier within the session for its lowest since Jan. 4.

U.S. West Texas Intermediate (WTI) crude slid $2.09, or 2.7%, to $74.19 after touching its lowest since Dec. 22 final yr at $73.60.

Each benchmarks, which hit 10-month lows final week, have posted three consecutive weekly declines.

Not solely are oil costs decrease than they have been earlier than the warfare broke out in Ukraine, however they’re principally flat on the yr:

I convey this up to not dunk on these forecasts.1

These forecasts all made sense given the knowledge we had on the time.

This yr is stuffed with stunning outcomes within the markets however this one could be probably the most stunning to me.

And the loopy factor is it’s arduous to discover a good purpose for oil costs coming down a lot.

Certain, the White Home launched the strategic oil reserves and China continues to have its Covid lockdowns. Perhaps the market is waiting for demand destruction from a possible recession. Or possibly the treatment for top costs was excessive costs?

It certain doesn’t really feel like there was a obviously apparent catalyst for the transfer greater in oil costs to reverse.

The factor that’s arduous about markets is you can be utterly proper concerning the geopolitics and nonetheless be improper concerning the value motion.

Or you can be utterly proper concerning the macro and nonetheless be improper concerning the value motion.

For example, let’s say I might have instructed you earlier than the beginning of the yr that oil costs could be flat via the tip of November.

How would you assume vitality shares would do in that scenario?

I suppose vitality shares2 don’t want greater oil costs to outperform:

Vitality is way and away the best-performing sector within the S&P 500 this yr and there isn’t an in depth second place.3

Markets are stuffed with contradictions, surprises, overreactions, underreactions and head-scratching strikes.

It’s all the time been this fashion however the extra I study concerning the markets the extra I notice how tough they are often.

Humility needs to be your default setting when attempting to determine what comes subsequent.

Additional Studying:
Markets Are Onerous: Seth Klarman Version

1And who is aware of — possibly we’ll nonetheless see $200/barrel for another purpose.

2My guess as to why vitality shares are performing so properly whereas oil costs have crashed is twofold: (1) Vitality shares have gotten crushed for years earlier than the previous 18 months or so and (2) It looks as if traders now notice the significance of this sector going ahead so that they’ve bid up share costs. Perhaps I’m improper.

3Actually, vitality is the one constructive sector on the yr. As of this writing, the following greatest performer is shopper staples, which is down 20 foundation factors or so. Utilities, healthcare and industrial shares are additionally holding up properly, all down lower than 5% on the yr.


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