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Wall Street Breakfast: OPEC On Deck

Mar. 02, 2022 7:29 AM ET131 Comments
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OPEC on deck

Oil's price ascent is showing no signs of slowing down ahead of one of the most important OPEC+ meetings since the beginning of the pandemic. WTI crude futures (CL1:COM) climbed another 6.6% overnight to top $110 per barrel, and that was despite the U.S. and other members of the IEA agreeing to release 60M barrels from the Strategic Petroleum Reserve and other emergency stocks. The coordinated drawdown would be only the fourth in the agency's history, sending a "unified and strong message to global oil markets that there will be no shortfall in supplies as a result of Russia's invasion of Ukraine."

Analyst commentary: "Although the sanctions are still being crafted to avoid energy price shocks, we believe this aggressive-but-not-maximalist stance may not be sustainable, with disruptions to oil and gas shipments looking increasingly inevitable," Evercore ISI wrote in a note to clients. "Russia is casting a long, dark, unpredictable, and very complicated shadow." Part of the issue is that many Western banks, shipowners and refiners are hesitant to do business with Moscow, fearing legal/reputational risk, or an eventual sanctioning of Russia's energy sector.

Meanwhile, the OPEC+ group, which Russia is a part of, commands broad control of the oil market because its members account for more than 40% of global crude production. The alliance has been recently increasing output by 400K barrels per day each month after unwinding historic cuts of nearly 10M bpd implemented in April 2020 due to the pandemic. Despite the current turmoil in energy markets, only a modest increase is expected at today's meeting - if any at all - which could fluctuate based on the situation in Ukraine or the world's response to it.

Inflation watch: A general rule of thumb states that for every $10 increase in the price of an oil barrel, U.S. inflation rises by 0.4 to 0.5 percentage points. That's hammering consumers at the pump, with the national average for a gallon of gas standing at $3.65 per gallon, according to data from AAA. "Global energy security is [also] under threat," according to IEA Executive Director Fatih Birol, "putting the world economy at risk during a fragile stage of the recovery." (5 comments)

State of the Union

On Russia: President Biden said that Vladimir Putin will have to "pay a price" for the invasion into Ukraine during his first State of the Union address to Congress. "Throughout our history we've learned this lesson – when dictators do not pay a price for their aggression, they cause more chaos. They keep moving. And, the costs and threats to America and the world keep rising." "Putin's war was premeditated and unprovoked. He rejected efforts at diplomacy. He thought the West and NATO wouldn’t respond. And, he thought he could divide us here at home. Putin was wrong. We were ready."

Inflation: Biden also vowed to fight inflation during the speech, with consumer prices soaring 7.5% over the past 12 months. "My top priority is getting prices under control. We have a choice. One way to fight inflation is to drive down wages and make Americans poorer. I think I have a better idea to fight inflation: Lower your costs, not your wages. Make more cars and semiconductors in America. More infrastructure and innovation in America. More jobs where you can earn a good living in America instead of relying on foreign supply chains, let's make it in America. My plan to fight inflation will lower your costs and lower the deficit."

Infrastructure: "We're done talking about infrastructure weeks. We're going to have an infrastructure decade. We'll create good jobs for millions of Americans, modernizing roads, airports, ports and waterways all across America. And we'll do it to withstand the devastating effects of the climate crisis and promote environmental justice. We'll build a national network of 500K electric vehicle charging stations, begin to replace poisonous lead pipes - so every child - and every American - has clean water to drink at home and at school, provide affordable high-speed internet for every American - urban, suburban, rural and tribal communities."

Manufacturing: "The revitalization of American manufacturing: Companies are choosing to build new factories here, when just a few years ago, they would have built them overseas. Intel (INTC), the American company that helped build Silicon Valley, is going to build its $20B semiconductor mega site. Ford (F) is investing $11B to build electric vehicles, creating 11K jobs across the country. GM (GM) is making the largest investment in its history - $7B to build electric vehicles, creating 4K jobs in Michigan. All told, 369K new manufacturing jobs are created in America last year alone."

Taxes: Under my plan, nobody earning less than $400K a year will pay an additional penny in new taxes. Nobody. The one thing all Americans agree on is that the tax system is not fair. We have to fix it. I'm not looking to punish anyone. But let's make sure corporations and the wealthiest Americans start paying their fair share. Just last year, 55 Fortune 500 corporations earned $40B in profits and paid zero dollars in federal income tax. That's simply not fair. That's why I've proposed a 15% minimum tax rate for corporations... That's why I've proposed closing loopholes so the very wealthy don’t pay a lower tax rate than a teacher or a firefighter." (362 comments)

Airspace ban

Following in the footsteps of the EU and Canada, President Biden also announced a ban on Russian aircraft and airlines entering American airspace due to Moscow's invasion of Ukraine. According to Western military officials, the war is now heading into a new phase, with Russia turning to heavy artillery and the indiscriminate shelling of civilian neighborhoods. The more destructive stage even prompted Ukraine to sell $270M worth of war bonds overnight, ahead of a planned siege on the capital of Kyiv.

Quote: "We will join our allies in closing off American air space to all Russian flights, further isolating Russia, and adding an additional squeeze on their economy," Biden exclaimed in his first State of the Union address. The ban, which will take effect by the end of today, will prohibit any plane owned, certified, operated, registered, chartered, leased, or controlled by, for, or for the benefit of a person who is a citizen of Russia from flying over the U.S.

Russia is expected to retaliate with similar measures and may even go after Boeing (NYSE:BA), a major American exporter and one of the world's two leading aircraft manufacturers. While U.S. carriers don't operate any non-stop flights to Russia, its airspace is part of a key corridor for many long-haul flights to Asia. United Airlines (NASDAQ:UAL) typically flies over Russia en route to India, while Delta (NYSE:DAL) and American Airlines (NASDAQ:AAL) already suspended flying over Russian airspace earlier this week.

Go deeper: Russia is said to derive a significant amount of money from the fees it imposes to use its airspace, or to land at one of its airports. The new ban will also affect the lucrative air-cargo services markets, impacting operations of carriers like FedEx (NYSE:FDX) and UPS (NYSE:UPS). In fact, cargo flights between Asia and North America account for a quarter of global freight traffic, according to the IATA, putting the supply chain on watch once again. (2 comments)

In the hot seat

Fed Chairman Jerome Powell will walk a tightrope over the next couple of days, addressing separate House and Senate panels as part of biannual hearings on monetary policy. The testimony before Congress will likely be his final public remarks before the FOMC embarks on a rate hike cycle, with inflation running at its highest level since the 1980s. Powell will emphasize his commitment to taming the price pressures, while being mindful of economic growth and geopolitical tensions surrounding Russia and Ukraine (not an easy task). Lawmakers will meanwhile question the Fed's balance sheet and global dollar demand, as well as labor/supply bottlenecks and financial conditions and stability.

Snapshot: Up until a week ago, markets were pricing in 25 basis point hikes at each of the FOMC's seven remaining meetings for 2022. There were even expectations of a stronger move this month, with some forecasting a 50 bps increase at the March 15-16 gathering. However, once the crisis in Ukraine erupted, investors dialed back those beliefs, and are now seeing around five hikes this year to bring the Fed funds futures rate up to a range of 1.25%-1.5%, according to CME data.

"Powell has to thread a pretty thin needle. The balancing act is going to be difficult," explained Mark Zandi, chief economist at Moody's Analytics. "My sense is he leads with the uncertainty that this all creates given that the Russian invasion could take many different paths, each one darker than the other. He'll reinforce the point that in a period of such heightened uncertainty, it might make sense for the Fed to be a little more cautious in enacting policy."

State of the Union: President Biden also made a reference to the central bank in last night's address, saying "confirm my nominees to the Federal Reserve, which plays a critical role in fighting inflation." (10 comments)

Today's Markets

In Asia, Japan -1.7%. Hong Kong -1.8%. China -0.1%. India -1.4%.
In Europe, at midday, London +0.8%. Paris +0.4%. Frankfurt +0.1%.
Futures at 6:20, Dow +0.5%. S&P +0.5%. Nasdaq +0.6%. Crude +6.6% to $110.27. Gold -0.7% to $1930. Bitcoin +1.4% to $44,150.
Ten-year Treasury Yield +4 bps to 1.75%

Today's Economic Calendar

Auto Sales
7:00 MBA Mortgage Applications
8:15 ADP Jobs Report
9:00 Fed's Evans: U.S. Monetary Policy
9:00 Fed's Bullard: U.S. Economic and Monetary Policy
10:00 Powell Testifies on Semi-Annual Monetary Policy Report
10:30 EIA Petroleum Inventories
11:00 Survey of Business Uncertainty
2:00 PM Fed's Beige Book

Companies reporting earnings today »

What else is happening...

Sales growth and profitability impress at Target (TGT).

Salesforce (CRM) pops as Q4 earnings beat expectations.

Blame Putin: AMD (AMD) tumbles on export control sanctions.

Apple (AAPL) cuts off online sales and product exports to Russia.

Moscow charges Meta (FB), Google (GOOGL) with 'inciting' social media war.

Wheat surges near $10/bushel as Russia's invasion strands shipments.

Kohl's (KSS) doubles quarterly dividend, announces $3B buyback.

Nordstrom (JWN) skyrockets as retailer issues strong guidance.

Stellantis (STLA) plans to launch Jeep electric SUV early next year.

Exxon (XOM) withdraws personnel, halts drilling operations in Russia.

Chevron (CVX) hikes buyback plans to as much as $10B annually.

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Comments (131)

Biden failed. The answer was for the US to open up energy production. Go back to providing 100% of US needs and a larger % of Europe's needs. Then they can cut off Russian oil and financial cripple them until Putin is gone and need resolve because it may take a few years, not a few months. Dictators don't go down easily.
Retire2020 profile picture
@tlapp Biden and Europe are in the same green boat. Long Putin I can see.
With a pending Russian Energy embargo and 40 year high on Inflation, what is the upside of the equity markets…5% maybe ?

Does risk outweigh reward, as the Federal Reserve starts raising rates to slow growth…?

Downside risk is a Bear Market drop of equities for the S&P500 hitting 3000 by year end…

Ukraine falls and Russia installs an occupying force. Russian energy sanctions remain in place for longer, pushing Inflation into a stagflation style declines….

Hang On…!!!
Listening to the SOTU, you have to admire a dedicated marketing campaign. An item struck me. SOTU "I think I have a better idea to fight inflation: Lower your costs, not your wages." Good marketing. Business...?.
1. For most businesses (including Government) wages are a significant (if not the driving) cost of business. Mr Biden's administration has artificially driven the cost of wages higher, initially focusing on the minimum wage arena, and then, with the injection of massive amounts of money into the economy, generally across the board. Without a program I can see that significantly increases productivity. Some make the argument that Admin pandemic policies restrict or drive down productivity. Apparent result: significant increases in inflation.
2. However, in one area wages buck the trend. A significant portion of the work force, heavily focused on labor supporting Federal contracts, is driven by Service Contract Act (SCA) wage tables, government mandated minimum wages in a wide variety of skills. A large number of laborers supporting the Federal Government (and often by extension, federally funded state contracts) wages are driven by SCA Wage Determination tables reviewed and set by the government. While driving corporations to greatly increase minimum wages, the government has been curiously slow to increase the wages in SCA. As an example (because I have worked on it recently) an Engineer Technician V in a western state has gotten a hourly wage increase of 27cents (an increase of less than 1%) in the last 3 years as of Dec 2021. How do you think that person views 7% inflation? Granted, that is one example out of hundreds of skills and locations, but it is telling. The government appears to be artificially driving up the cost of wages for corporations and small business while apparently restricting the rise of cost of business for itself. It would be interesting to look at GS wages. You may have to re-evaluate your analysis of federal contractors.
Of course, we can't expect our "Allies", the Saudis, to step up and boost production. I'm sure they're delighted to reap the extra profits while supporting another mad dictator's play. When are we going to realize we'd be better off doing business with Iran, which at least makes no secret of how it feels about us. The Saudis are the worst, from their human rights abuses to the war crimes in Yemen to the Putin like killing off of any critics. They need to pay us for 9/11, which they sponsored!
OPEC is not in business for YOUR comfort and convience they are in the business of producing oil at market rates and profits go to their own peoples but i guess you have a problem with free enterprise . want cheaper oil prices then jump on brandens ass and open the US oil and gas spiggot
@john boy Your heroes in OPEC are the ones who lowered prices in an attempt to shut down the US frackers and ended shooting themselves in the foot with $40 oil, which US ingenuity and low interest rates countered. Luckily for your Saudi overlords, Covid lead to the decrease in demand that caused the slowdown/stopping of drilling in the US oil patch. I guess you're too young to remember that far back. There have been more permits to drill on federal lands issued under Biden than in any similar period under your other hero. Now the market price is helping motivate US drilling to increase, look at rig counts and activity in formerly almost shut down fields. Please use facts instead of knee-jerk "it's all Branden's fault" blather, this is an investing website.
@cyfie52 Another newby here to spread propaganda.
Retire2020 profile picture
"Lower your costs, not your wages. Make more cars and semiconductors in America." So if the wages remain high, how do you lower the costs of cars and semiconductors? The wages were high because you idiots flood the market with money making the lazy to be choosy.
maddaj19 profile picture
I pretty sure OPEX, Russian/Ukraine, inflation, et al can get oil up to $200/barrel. Because high oil prices never cause recessions. Weren't we energy independent a few years ago?
Ishi Kenjo profile picture
@maddaj19 Yes we were energy independent until day 1 of Biden. His first step was killing production to raise costs on citizens. His speech was fiction. Nothing he does reduces costs of anything that matters to average people. The Fed will drag feet and raise less than projected... inflation will remain high. Costs will remain high unless there us a crash. Don't blame Joe & his grab bag of globalist garbage. He is in lala land while the two crazies behind him laugh gleefully at his ridiculous comments & lies.
@Ishi Kenjo "His speech was fiction" no fiction here
yogatech profile picture
@maddaj19 I have read so many of your comments that as soon as I see your name I know that I am going to like them. 💯
maddaj19 profile picture
The SOTU talking points above range from the absurd to flat out lies.
@maddaj19 The SOTU speech was nothing but absurd flat out lies.
deercreekvols profile picture

Thanks for the example of a purely political comment that has nothing to do with investing.

I thought you knew what I was talking about and it seems that you do.
@deercreekvols Do high gas prices and inflation have any impact on investing? If so do lies about those same issues have any impact on investing? Seems like any comment that goes against your politics you label as "purely political".
"...it might make sense for the Fed to be a little more cautious in enacting policy.""

In other words, let's use Ukraine as cover to kick the can down the road just a little bit more....
blueline profile picture
Finally some good news. The Urals which is Russia's oil benchmark was being offered at close to a 20% discount.

One Russian 200K barrel March delivery didn't receive a single offer.

Refineries are refusing Russian oil and banks are refusing to finance Russian commodities.
RightWingAnon profile picture

Go woke, go broke. It’s the world’s poorest that will feel the brunt of rising food and energy costs.
@blueline its a best case scenario when corporations take actions before or even in the absence government sanctions. I took a little hit on BP but glad they severed ties.
and i hear small oil shippers wont ship out of fear of retribution so the world/market is bypassing branden oh ishe gonna get a cut in payola
They had the chance to 'tax the rich'... all they had to do was write the person's name in the legislation passed in 2021. There is zero desire for the democrats to 'tax the rich' within the democrat elites. 'The Rich' are some of the most prolific supporters of the democrat elites. We do live in a weird world where you can have your opinion assigned to you by the weaponization of persuasion.
maddaj19 profile picture
@Fizawill Instead of "taxing the rich" they're taxing people who make more than $600 through a side hustle and are paid through PayPal, Venmo, etc. I find that truly hilarious.
@maddaj19 1099-MISC has had a $600 minimum reportable threshold for at least the last 10 years.
maddaj19 profile picture
@DanielGannon1 It was self reported. The IRS turned payment processors into an enforcement arm and they're going to issue a 1099K and report to the IRS for anyone who earned over $600. Again, this is absolutely hilarious, tax the rich, good one guys!
JAMES CARLINI profile picture
If we follow the points made in the State of the Union - BUY American should also include Oil. If we do not open up the oil fields and permits, oil is predicted to go to $150 a barrel, based on comments heard this morning.

If oil does go higher, it will further cripple the economy and skyrocket inflation.

As for infrastructure, we have to get everyone on "the same page" as to what "Infrastructure" includes.

Infrastructure is the "platform for commerce" and should include more than just roads, bridges, and railroads. It includes airports, the power grid ,AND the network infrastructure which still has been neglected to be recognized by the American Society of Civil Engineers in their latest "report card" on infrastructure which was in 2018.

They were criticized for this oversight back in 2009 at a US Department of Homeland Security's Conference on Aging Infrastructure and yet they are still in the dark. Before we can upgrade infrastructure, we better know ALL the layers that it consists of.
@JAMES CARLINI There's nothing that sells better than any buy local campaign. We'd all rather help our neighbor than some nameless corporation, particularly when we know our neighbor will also spend locally. Of course, if we all do this consciously, or by government decree, we are back in the economic disfunction and inefficiency of the Middle Ages. Biden's traditionalist mid 20th century liberal protectionism was the part of his speech that I least appreciated. When I hear similar pronouncements by Quebec and Canadian politicians, I feel the same way. Heck, the British repealed the protectionist Corn Laws in 1846 in recognition that David Ricardo's precepts on trade made sense. Politicians who know better shouldn't succumb to the temptation of easy acceptance by the voters. For all the verbiage they spew, a little education would be appreciated.
A quick fact check of what was said last night does not bode well at all…and I’m putting that extremely mildly…it would have been better to just apologize and tell the truth…
blueline profile picture
Where is the political page?
"That's why I've proposed closing loopholes so the very wealthy don’t pay a lower tax rate than a teacher or a firefighter." Teachers often have to pay more in taxes as part of a dual income household. At least increase the deduction for all the stuff they buy for the classroom since it's been only $250 dollars forever. Because you're not really going to close the loopholes on the rich.
matttrakker profile picture
@PFT3 teachers don’t deserve a thing. Can’t even get them to show up for class. Zoom forever. If the teachers unionize to whom are they unionizing against? Taxpayers. Yikes.
@PFT3 Teachers are not underpaid. Theyale good wages. A teacher and a police officer couple, is no different than a utility worker and a department store clerk. The last couple doesn't get any special deduction. Why should a teacher?
@Kyle54 oh boy this is a softball question, how about we pay the teacher and police officer more money. Both are a valuable and important service to this country that need the best candidates.
deercreekvols profile picture
“Nobody is watching the State of the Union,” Elon Musk said in an email to CNBC. President Biden touted the combined $18 billion investments by Ford and GM to build electric vehicles. Tesla, an electric automaker giant, wasn’t mentioned in President Biden’s address to the nation.

Musk later tweeted directly to Biden saying “Tesla has created over 50,000 US jobs building electric vehicles & is investing more than double GM + Ford combined.”

The tweet is something that any CEO should have done. Point out the facts. The email is that of a petulant child. This is the rub with Elon Musk.

Politics and investing certainly can be connected, as they are in this "feud" between the CEO of Tesla and the President of the United States.

Let's try to avoid comments that are purely political and not connected to investing.

Have a great day everyone.
@deercreekvols yeah… but Elon is right…
deercreekvols profile picture
@boatlife87 -

As I stated above, Elon Musk stating facts is what a CEO should do. Emailing CNBC about "nobody watching" the SOTU is childish. He was hurt that Tesla was not mentioned.

Did Elon Musk mention that it was the US government who originally financed Tesla while he was whining.
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