The JMP Weekly Report with Chris Hagan

What we’ve been reading this week

SPR and Inflation – Strategic Petroleum Reserve Hits Historic Low

Posted 08/08/2023

Since 1975 the Strategic Petroleum Reserve has given the US self-assurance on the ability to be able to respond to Emergencies and economic oil warfare.  Since the Ukraine war the US government has used the SPR not as an emergency measure, but rather to fight inflation created from the Russian oil sanctions due to their invasion of Ukraine.  As stocks now dwindle to the lowest level since 1983, and every attempt the US government makes to refill it is thwarted by OPEC will the inflation detractor now add to the world energy inflation again?

Strategic Petroleum Reserve

In 1973 OAPEC (Organisation of Arab Petroleum Exporting Countries) proclaimed an oil embargo on the US after the American support for the Yom Kippur War, raising oil prices by 300%.  In response, the SPR or the Strategic Petroleum Reserve was introduced in 1975 to mitigate the risk of future oil embargos.  It is the largest publicly known emergency supply of oil, housed in underground tanks in abandoned salt mines in Louisianna and Texas.  In July 2023 the SPR is 346.8million barrels which is about 17 days of oil.  This is the lowest level since 1983.

Ukraine War and Inflation fight

On March 22 in response to the Ukraine war Joe Biden announced his administration would release 180 million barrels (at a price of $96 vs price paid of ~ $28) to help with US oil prices during the Ukraine war oil shock.   This helped lower gasoline prices an estimated 17c-43c per gallon in the US obviously helping to moderately lower inflation.

After selling the oil at $96/barrel the Biden administration in December last year announced they planned to refill the SPR at around $67-$72/ barrel but appear to be thwarted every time they announce a purchase and the SPR level continues to dwindle.

The problem the Biden administration now has is every time they go to start replenishing the SPR OPEC keeps responding with cuts in production – rising the oil price again.  An Analysis done by the Kobeissi Letter on Twitter has tracked each announcement and each response from OPEC and charted it.

 Pulled Offer

On August 1^st, the Biden administration pulled an offer to buy 6 million barrels of oil for the SPR, with market conditions, AKA price and tight oil supply, hindering the plan.  Unfortunately for the US they appear to have missed the current window of $67-$72/barrel as oil prices again climb above $80/barrel, currently sitting at $82.  Crude prices are in fact now expected to rise further with OPEC+ cutting output, 3.66million barrels since November last year.  This now means that if the Biden administration wants to refill the reserves they will in fact be adding further to oil inflation by increasing demand.  So they are being left with the option of Emergency energy security or adding to the current precarious inflation situation, as oil prices once again begin to spike.

Trump 2020 and the SPR

In 2020, under Trump’s term, the Department of Energy (who runs the SPR) proposed filling the SPR to its maximum capacity adding an additional 77 million barrels ,however the bill was scuttled at $24/ barrel (the current SPR reserve is an average price of $29.7) claiming it was an oil industry bail out.  The $24/ barrel price seems relatively inexpensive compared to the current $82/barrel Biden may be forced to refill at.

Oil Price Rebound

With OPEC fighting to keep the price high, the Ukraine war continuing and the dwindling SPR in the US, inflationary pressures in energy prices may resume again.  Oil is a huge contributor to broader inflation at a time when most economic indicators are plummeting.  That spells stagflation…

16 Banks Downgraded, China in Trouble – Truths as Tide Goes Out

Posted 10/08/2023

Moody’s Investor Service has just cut the credit ratings of 10 banks.  They also targeted 6 more for potential credit downgrades, including the well-known:

• Bank of New York Mellon (BK.N), 
• US Bancorp (USB.N), 
• State Street (STT.N),
• Trust Financial (TFC.N)

Moody’s noted that many banks have been suffering from increased pressures to their profitability and may have trouble when it comes to generating capital internally.  They also made mention of a mild US recession coming in early 2024 that will put some banks and real estate portfolios at risk.  Commercial real estate is already particularly at risk due to high interest rates, difficulty accessing credit and the trend of working from home.

11 Major Lenders Also Given “Negative” Outlooks

The list includes heavyweights, such as:

• Capital One (COF.N), 
• Citizens Financial (CFG.N),
• Fifth Third Bancorp (FITB.O).

We are currently in an environment in which credit is rapidly drying up, pushing borrowers to pay down their debts as fast as they can.  This accelerates the process of the money supply disappearing, and in turn makes the downward spiral move more quickly.  The Fed has not let up and has been hiking rates faster than they have in recent decades.  Now it seems rating agencies have become the next major thorn, downgrading the US’s credit rating and now making sweeping downgrades to banks.

Tightening credit could also be the major culprit in the recent shocking data to come out of China:

China’s Imports & Exports Both Suffer Double-Digit Falls

Analysts got a rude awakening on Tuesday when Chinese data showed a 14.5% drop in exports and a 12.4% drop in imports compared to last year.  More Specifically, their exports to the US and Europe fell over 20%, to each.  If China thought the worst is over, they may not have just cut their imports so heavily, which are used to process and produce goods to export.  July marks the 4^th month in a row that China’s manufacturing sector has contracted.

Not surprising then, yesterday we learned that the Chinese economy slipped into deflation, with consumer prices falling (0.3%) for the first time in more than two years in another sign of weakening demand. In a sign of more to come, their producer price index (PPI), which measures goods prices at the factory gate, also dropped by 4.4% in July y/y. That makes the 10th straight drop in PPI, and the first time since November 2020 that both the CPI and PPI have fallen in the same month signalling a likely protracted period of stagnation in the 2^nd biggest economy in the world.

Tighter Conditions Can Reveal Truths

One of these ‘truths’ can be which banks are overleveraged and have no reliable means of generating revenue.  Another can be the repricing of assets.  According to the website USdebtclock, currently only 1 out of every 291 ounces of silver being traded (such as in banks) actually exist in physical form.  If increased distrust in financial institutions causes traders to withdraw their investments in physical form, most silver investors could be in for a shock.  Imagine the majority of the population finding out that they overestimated the supply of silver by 291X!

New Zealand, BlackRock Launch $1.2 Billion Climate Infrastructure Fund to Accelerate Energy Transition Goals

ENERGY TRANSITION/ GOVERNMENT/ INVESTORS

Mark Segal August 8, 2023

The Government of New Zealand and investment giant BlackRock announced today the launch of a new NZ$2 billion (USD$1.2 billion) fund aimed at investing in New Zealand’s climate infrastructure.

In a statement announcing the launch, the government said that the goal of the fund is support New Zealand’s ambition to be one of the first countries in the world to reach 100% renewable energy. The fund will include investments from private sector funds, as well as New Zealand crown companies and superannuation funds.

According to Minister of Energy and Resources Megan Woods, the new fund will enable businesses to access pools of capital for investments in cleantech and infrastructure to accelerate the country’s emissions reductions, including areas such as battery storage, wind and solar generation, green hydrogen production and electric vehicle chargers.

Woods added:

“The projects funded through investment in the New Zealand net zero Fund will not only decarbonise our energy use, but will also create highly-skilled jobs here in New Zealand, and opportunities to grow New Zealand companies.”

The launch of the fund follows the release last year by the government of its Emission Reduction plan to address climate change and the country’s transition to a low emissions economy. Key initiatives in the plan included setting a target for 50% of total final energy consumption to come from renewable sources by 2035, and to develop energy strategies for a net zero economy in 2050. New Zealand has also set an aspirational goal to reach 100% renewable electricity by 2030.

Prime Minister Chris Hipkins called the fund “a game changer for the clean tech sector,” that will “super charge investments in clean technology that might otherwise not have happened.”

Hipkins added:

“With countries around the world experiencing the impacts of climate change on a daily basis, it’s never been more urgent to invest in technology that will help address the climate crisis, and New Zealand is well positioned to be a home for that investment.”

According to BlackRock, the fund marks the firm’s largest single country decarbonization-focused project to date. In a statement announcing the launch of the fund, BlackRock Chairman and CEO Larry Fink said:

“New Zealand doesn’t just have the ambition to build a more resilient energy system and be a leader in decarbonization globally. It is already doing that today. As we approach COP28 at the end of this year, the world is looking for models of cooperation between the private and public sectors to ensure an orderly, just, and fair energy transition. Building on BlackRock’s Climate Finance Partnership fund announced at COP26 in Glasgow, the New Zealand climate infrastructure strategy can be a model for how to scale and implement this vision.”

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Regards,