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Earnings Season and Crude Oil

April 03, 2023

The first quarter is now in the books and we start into the second quarter and earnings season. The stock market finished the first quarter on a strong note and many money managers are scratching their heads. There is a lot of negative sentiment in the financial press, and many expect the markets to struggle with all of the headwinds for the economy lead by higher interest rates.

We have written repeatedly about the inverted yield curve – two-year interest rates higher than ten-year interest rates. Although historically that has been a great indicator of pending recessions, we haven’t fallen into that yet with this iteration of the inverted yield curve. The earnings season coming will be very interesting according to Refinitiv – a global provider of financial market data, the S&P 500 earnings per share will decline 4.6% in the first quarter of 2023 as compared with a year earlier, but our guess is it will be surprisingly strong which will justify the resilience of the stock market recently.

One curve ball that just got thrown at the world economy over the weekend was a surprise cut in crude oil production announced by OPEC. On Sunday, Saudi Arabia said it would start “a voluntary reduction” in its production of crude oil as a precautionary measure to maintain the stability of the oil market. The collective output cut by the nine members of OPEC+ totals 1.66 million barrels per day and they have increased their price estimate of Brent crude to $95 for the end of the year. Obviously, this is concerning from the perspective of inflation as the central banks around the world have been struggling with since the beginning of 2022. Crude oil is of course, one of the more critical inputs of world economic output so when the market price starts jumping it is of concern – take a look…

Crude oil prices jump as OPEC is flexing their muscles and there isn’t much we can do about it. Strategically, the U.S. Government built the “Strategic Petroleum Reserve” this is from the U.S. Gov energy website…

The Strategic Petroleum Reserve (SPR), the world's largest supply of emergency crude oil was established primarily to reduce the impact of disruptions in supplies of petroleum products and to carry out obligations of the United States under the international energy program. The federally-owned oil stocks are stored in huge underground salt caverns at four sites along the coastline of the Gulf of Mexico. The sheer size of the SPR (authorized storage capacity of 714 million barrels) makes it a significant deterrent to oil import cutoffs and a key tool in foreign policy.

Russia is by some measures the number one exporter of energy in the world. After the Russian invasion into Ukraine, the Biden Administration started releasing crude oil from this reserve to combat the prices you see on the chart above. That’s what it was built for, we get it. What we don’t get is why that crude hasn’t been replaced. Again, referencing the chart above crude oil prices calmed down to the point of trading for weeks in the $65 range. We have heard talk of replacing the more than 250 Million barrels that were depleted. The Energy Department did a press release in December about repurchasing – but we don’t see that any of repurchases have occurred…

Now with OPEC rigging deals for crude oil sales outside the U.S. dollar and slowing production down, it is concerning that price is taking off and we are still light on our emergency supplies.

The Energy Department’s own website hasn’t even updated the front page of the SPR explanation The second paragraph refers to the 2011 reduction of the SPR as being the most recent historically. It sure looks like someone is asleep at the wheel with the management of the SPR and that is concerning considering the importance of crude oil for our day to day lives. Sprinkle on top the politicization of energy and the recent decrease in research and development in the nasty fossil fuel world and it seems things might start to get complicated.

Overall, the financial markets have been holding together remarkably well considering the challenges domestically and abroad. We are continually on the lookout for cracks in the dam and energy supplies are definitely something to keep an eye on. In the meantime continue to rebalance portfolios if there is a risk imbalance and make sure to own some gold!

Regards and good investing,

Greyson Geiler