Wall Street Breakfast: Black Gold

Oct. 06, 2022 7:15 AM ETCVX, F, RIVN, GM, TSLA, TGT, AMZN, XRT, AAPL, GE, COMP, LCID, LGVC121 Comments
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Petroleum, petrodollar and crude oil concept : Pump jack and flag of OPEC or Organization of Oil Exporting Countries, depicting the investment in the development or production of global oil industry.

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Black gold

No outsized moves were seen in crude markets yesterday after OPEC+ slashed production by a whopping 2M barrels per day from November. That's because traders had been pricing in the cut since Sunday, sending up WTI crude futures (CL1:COM) from $79 to $86 over the course of the week, before contracts ended Wednesday's session at $87/bbl. Analysts also note that the 2M headline figure will really translate into just over 1M barrels per day, or ~1% of actual global supply, given that many OPEC nations are currently producing well below their individual quota levels.

Snapshot: The bigger deal is that Saudi Arabia and Russia are not only willing to work together to prop up crude markets, but they are deepening their ties despite the war in Ukraine. The cut is a big win for Moscow, which has already lost about 1M bpd of production due to sanctions from the conflict, and faces an EU oil embargo starting in December. It's also a blow to U.S. efforts of re-engaging with Saudi Arabia after President Biden labeled the country a "pariah" and refused to talk with Crown Prince Mohammed bin Salman for years following the killing of U.S.-based columnist Jamal Khashoggi.

Biden even undertook a trip to Riyadh in the summer after U.S. gasoline hit $5/gallon, promising at the time that the Kingdom would "take additional steps" to increase oil supply. While the sentiment took hold and prices at the pump came down, there are fresh fears over what an increase could mean for the U.S. economy, especially with gas costs already climbing over the past week (due to Midwest refinery problems and West Coast maintenance). For its part, OPEC+ painted the decision as a "preemptive" move against a slowdown in global demand, as well as not repeating the mistakes of central banks who took too long to respond to inflation.

Statement from the White House: "The President is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin's invasion of Ukraine," National Security Advisor Jake Sullivan declared. Biden will also consult with Congress on ways to "reduce OPEC's control" over energy prices (signing of NOPEC legislation?) and continue to direct Strategic Petroleum Reserves releases "to protect American consumers and promote energy security." Meanwhile, new reports suggest that the administration is preparing to scale down sanctions on Venezuela, which would allow Chevron (CVX) to resume pumping oil and reopen exports to American and European markets. (266 comments)

Raising prices

Companies across the auto industry have suffered from parts shortages since the pandemic, and Ford (F) is no different. The shortages span several industries, ranging from EV materials like nickel and cobalt to components such as semiconductor chips and controls. The developments have even resulted in carmakers needing to store uncompleted vehicles, which is affecting their bottom line and adding to sticker prices across the nation.

Inflation deepens: It was only two weeks ago that Ford shocked the auto sector, disclosing that it expects to have 40K to 45K "vehicles on wheels" at the end of the third quarter that are lacking parts currently in short supply. On top of that, the company warned that inflation-related Q3 supply costs would be ~$1B higher than originally estimated. Suppliers are also facing a world where raw commodity prices are going up, and they are passing along those costs to automakers and their consumers.

As a result, Ford previously raised the price of its Mustang Mach-E SUV, and just upped the cost of its F-150 Lightning by $5,000 for the 2023 model year. It's the second time that Ford has raised the price on the electric pickup over the past two months, with its "most affordable" Pro model now coming in at $51,974 (up 11% from August and 30% from the truck's $39,974 price tag in May 2021). Customers that hold existing orders with Ford won't be affected by the price increase.

Outlook: The F-150 Lightning is still way cheaper than the starting Rivian (RIVN) R1T ($68,575) and GMC (GM) Hummer EV ($86,645). Also keep an eye on the coming price tags of the Chevrolet (GM) Silverado EV and Tesla (TSLA) Cybertruck. (53 comments)

'Tis the season?

Holiday sales are coming even earlier this year as retailers hope to get consumers excited and stave off a slowdown in demand. Target (NYSE:TGT) is kicking off its biggest "Deal Days" event - featuring hundreds of thousands of items from Oct. 6-8 - and will commence its "Holiday Price Match Guarantee" as of today. Amazon (NASDAQ:AMZN) is also holding an "Early Access Sale" for Prime members next week, marking the first time the e-commerce behemoth has ever done two Prime Day events in one year.

Bigger picture: The early deals could work in their favor. A recent Bankrate survey has found that half of all winter holiday shoppers plan on starting their buying before Halloween. Only 12% will wait until December to take out their wallets for the holidays, with many fearful of the supply chain snarls that have occurred over the past couple of years. Some even hope the early action could provide a boost to the sector, with the SPDR S&P Retail ETF (XRT) down 34% YTD to trail the performance of the broader market.

"Holiday shopping will look different this year with inflation around 40-year highs," noted Ted Rossman, senior industry analyst at Bankrate. "Consumers are still spending, but they're being especially thoughtful about where each dollar goes."

Case in point: 84% of holiday shoppers are implementing measures to reduce the cost of their purchases, like taking advantage of more coupons, discounts and sales. Nearly 3 in 5 (59%) plan to buy fewer items than in previous years, while 21% are opting for cheaper brands. Furthermore, 17% of those who plan on holiday shopping are redeeming rewards to offset costs, and another 17% plan to shop at outlets where they have loyalty programs or store credit cards.

All-time high

America's national debt has topped $31T for the first time, according to the latest figures from the Treasury Department. The record amount of red ink and gloomy fiscal milestone are adding to worries about the economic health of the country, which is grappling with red-hot inflation and a higher interest rate environment. Other factors like an aging population, elevated healthcare and defense costs, and a tax system that doesn't bring in enough revenue to cover spending are also worrying as the federal government kicks the can down the road.

Quote: "So many of the concerns we've had about our growing debt path are starting to show themselves as we both grow our debt and grow our rates of interest,” said Michael Peterson, CEO of the Peterson Foundation, which promotes deficit reduction. "Too many people were complacent about our debt path in part because rates were so low."

Long gone are the days of austerity conversations, the Tea Party movements or the balanced budget talk that made some political brownie points. Instead, many of the discussions today have shifted to whether the passing of more mega spending bills would be a net positive or negative for the overall economy. In fact, the U.S. has returned to the record debt-to-GDP ratio last seen in the aftermath of World War II, leaving the nation with a debt burden so large that it would need to spend an amount larger than the entire annual economy in order to pay it off (the debt-to-GDP percentage totaled 121% in Q2).

How much is too much? There's no magic number or level for when a government's debt begins to hurt its economy, but conventional thought said that as long as interest rates stayed low, the country could handle a much heavier debt load than was once thought possible (and even use those conditions to remain competitive on the international stage). However, the federal debt cannot grow faster than the economy indefinitely, especially as higher rates make servicing the debt more costly. Both the prior and current White House administrations have contended that trillions were needed to be spent fighting the COVID pandemic and a recession, but only time will tell if that just postponed the inevitable. (4 comments)

Today's Markets

In Asia, Japan +0.7%. Hong Kong -0.4%. China -0.5%. India +0.2%.
In Europe, at midday, London -0.5%. Paris -0.5%. Frankfurt -0.3%.
Futures at 6:30, Dow -0.6%. S&P -0.7%. Nasdaq -0.8%. Crude -0.2% to $87.62. Gold +0.2% to $1723.70. Bitcoin flat at $20,116.
Ten-year Treasury Yield +1 bps to 3.77%

Today's Economic Calendar

7:30 Challenger Job-Cut Report
8:30 Initial Jobless Claims
8:50 Fed's Mester Speech
10:30 EIA Natural Gas Inventory
1:00 PM Fed's Evans Speech
4:30 PM Fed Balance Sheet
5:00 PM Fed's Waller Speech
6:30 PM Fed's Mester Speech

Companies reporting earnings today »

What else is happening...

Fed must stay 'purposeful and resolute' in inflation fight - Bostic.

Apple (AAPL) to shift some AirPods, Beats production to India.

Turnaround strategy? GE (GE) lays off workers at onshore wind unit.

Real estate brokerage Compass (COMP) jumps on takeover interest.

Mortgage applications down on higher rates, hurricane arrival.

Tesla Model S (TSLA) barely beats Lucid Air (LCID) in Edmunds' review.

South Korea's reprisal blows up after Pyongyang missile success.

LAMF Global Ventures I (LGVC) may merge with soccer's Everton FC.

This article was written by

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