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Tuesday, February 20, 2024

The Factor That’s Arduous About Markets

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

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

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

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

Simply have a look at all the headlines from March of this yr:

We spent the whole thing of the 2010s underinvesting in our power infrastructure after which probably the most necessary power sources on the planet mainly acquired reduce off due to the warfare.

Issues felt bleak contemplating inflation was already on the highest ranges in 4 many years.

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 might go? And what degree could be worrying to you when it comes to demand destruction?

Pierre: Nicely, I feel, like near $200 a barrel — a lot increased than in the present day. I really feel like there’s no demand destruction at $110 a barrel and we’ll should go considerably increased 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’re not doing something. And we’re in confinement for 2 days a month. I imply, there might be some options like that to deliver demand down, but when there’s no authorities mandate, then I feel that round $200 oil will likely be sufficient to deliver demand to steadiness the market.

Joe: May we see $200 oil this yr?

Pierre: Sure, I feel so. Sure.

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

Nonetheless, the alternative 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 towards 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 mainly flat on the yr:

I deliver 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 filled with shocking outcomes within the markets however this one may be essentially the most shocking 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 remedy for top costs was excessive costs?

It positive doesn’t really feel like there was a manifestly apparent catalyst for the transfer increased in oil costs to reverse.

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

Or you can be utterly proper concerning the macro and nonetheless be flawed concerning the worth motion.

As an example, let’s say I’d have informed you earlier than the beginning of the yr that oil costs could be flat by means of the top of November.

How would you assume power shares would do in that state of affairs?

I assume power shares2 don’t want increased oil costs to outperform:

Power 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 filled with contradictions, surprises, overreactions, underreactions and head-scratching strikes.

It’s all the time been this manner however the extra I study concerning the markets the extra I understand how troublesome they are often.

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

Additional Studying:
Markets Are Arduous: Seth Klarman Version

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

2My guess as to why power shares are performing so nicely whereas oil costs have crashed is twofold: (1) Power shares have gotten crushed for years earlier than the previous 18 months or so and (2) It looks like buyers now understand the significance of this sector going ahead so that they’ve bid up share costs. Perhaps I’m flawed.

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


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