Topic Tags: Commodities

Fighting Fire with Oil

Lower oil prices, primarily via lower gasoline prices, were a key contributor to headline CPI moving off peak in July and August. Since late September, however, oil and gasoline prices have started to rise again. In early October, OPEC+ — comprised of the 13 OPEC members and 10 additional major oil-exporting countries, including Russia — agreed to steep oil production cuts, decreasing supply in an already stressed market. The total production cut is estimated to be around 2 million barrels per day (bpd), approximately 2% of global supply and the biggest production cut since the start of the COVID pandemic.

The move is expected to prop oil prices back up — as similar production cuts have done historically — after the commodity had fallen considerably over the last three months amid fears of a global recession, the stronger dollar, and higher interest rates. Higher energy prices would weigh on European countries, which are more heavily reliant on Russian oil and already facing recession, as well as the U.S. consumer, with oil accounting for roughly half of the retail price of gasoline. Earlier this year Federal Reserve Chair Jerome Powell quantified the impact of higher oil prices, noting every $10 per barrel increase in the price of crude raises inflation by 0.2% and sets back economic growth by 0.1%. The decision also adds to already heightened geopolitical tensions, with President Biden pursuing consequences for Saudi Arabia, the de facto leader of OPEC, following the announcement. This evolving situation is one more unknown variable to monitor as we look for macroeconomic clarity.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Picking up the Pieces: Assessing the Economic Impact of Hurricane Ian

The 2022 hurricane season is the latest headwind in a challenging year for investors. Last week, Hurricane Ian made landfall in Florida as a powerful Category 4 hurricane, unleashing heavy rains, high sustained winds, and extensive flooding along the coast. While the full extent of damages and the ultimate impact on the U.S. economy will not be known for several months, preliminary estimates indicate that Hurricane Ian will rank among the top 10 costliest storms in U.S. history. Current estimates of Hurricane Ian’s total cost — including damages and lost economic activity — range widely from $65 billion to as much as $120 billion. While several industries across the southeastern United States have been negatively impacted, Hurricane Ian’s overall impact on U.S. GDP is expected to be limited. Recent analysis by EY Parthenon, Ernst and Young’s global consulting arm, projects GDP to be reduced by 30 basis points in Q3 and 10 basis points in Q4 as a result of the hurricane. Natural disasters tend to have short-term economic consequences, with lost economic output recovered over time as federal assistance and insurance payouts allow communities to rebuild. Reconstruction efforts can also provide a temporary boost to GDP. As with other sources of uncertainty, Marquette encourages investors to maintain discipline and stick to long-term strategic allocations to best weather the market’s storms.

Print PDF> Picking up the Pieces: Assessing the Economic Impact of Hurricane Ian

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Livestream Videos: 2022 Investment Symposium

The presentations by our research team from Marquette’s 2022 Investment Symposium livestream on September 23rd are now available. Please feel free to reach out to any of the presenters should you have any questions.

View each talk in the player above — use the upper-right list icon to access a specific presentation.

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Past performance is not indicative of future results. For full disclosure information, please refer to the end of each presentation. Marquette is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Marquette including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request.

Halftime Market Outlook: A Mixed Bag

Last week, we hosted our “Halftime” Market Insights Webinar. As the host, my job was to introduce the analyst for each section and then summarize his or her comments before moving to the next speaker. After the fourth section, I found myself using the term “mixed bag” for the third time; it was at that moment that I knew I had my title for this letter!

Of course, “mixed bag” is an overused and unoriginal cliché to describe a perspective that features both positive and negative elements. If we focus solely on the first half of the year, it is hard to find much good news at all between negative economic growth, historically high inflation, and hefty losses in both the equity and bond markets. Even the good news is rooted in how bad things are…after all, how much longer can inflation stay above 9%? Could the equity market REALLY drop another 20% the second half of the year? Alas, our “mixed bag” descriptor admittedly relies on the assumption that conditions should improve at least somewhat for the remainder of the year, though likely not enough to reverse the damage inflicted during the first half. On an absolute and relative basis, growth and return figures should be better, but it is naïve to think that all of the bad news is behind us.

In this edition:

  • Inflation expectations
  • Consumer and business sentiment
  • The S&P 500’s worst six-month start to a year since 1970
  • Recession probability
  • The Agg’s worst start to a year ever
  • Bonds go back to being bonds

Read > Halftime Market Outlook: A Mixed Bag

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Oil Prices Aren’t All They’re Cracked Up to Be

Americans are paying more at the pump this summer than they ever have in the past. The national average in June for regular gasoline was $4.929/gallon. The only other time gasoline averaged more than $4 per gallon nationally was in June and July of 2008 when prices were $4.054 and $4.062, respectively.¹ Crude oil peaked at $140/barrel then. Why are we paying almost $5 per gallon at the pump when crude oil is only about $100/barrel today? The answer lies in the crack spread.

Crude oil is “cracked” to produce gasoline and distillates like heating oil and diesel in a 3:2:1 ratio, meaning for every three barrels of crude, two barrels of gasoline and one barrel of distillates are produced. The crack spread measures the difference between the purchase price of crude and the selling price of the finished products and is a proxy for refinery profits. Crack spreads have spiked over temporary periods in the past, though the median over the last 20 years has averaged just over $11/barrel. The prior peak occurred in August 2005 when Hurricane Katrina took much of the U.S. refining capacity offline, but, like most spikes, was short-lived as refining capabilities were quickly brought back online. The only sustained period of higher crack spreads occurred in 2012 — a year filled with hurricanes, refinery outages, and tensions in the Middle East — when spreads averaged in the mid-$20s throughout the year. At the end of June 2022, the 3:2:1 crack spread hit a new peak of $47.653/barrel, and this bout of elevated spreads may have more staying power.

The green revolution has had some negative externalities. There has been a retreat from refining as companies are reluctant to invest in fixed assets. Throughput has decreased by roughly 500,000 barrels/day to 16.7 million barrels with refineries operating above 90% capacity. Many refiners have closed or converted to producing biodiesel amid fears that refining assets would be stranded during the energy transition. While there is no easy fix to any component of inflation, gasoline dynamics are even more complicated, and until additional resources are committed to refining, higher crack spreads and higher gasoline prices may be here to stay.

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¹Source: U.S. Energy Information Administration

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

High on Lithium

Electric vehicle (EV) sales have seen significant growth over the past several years. Recently, elevated demand has contributed to a rampant increase in lithium prices, a primary input to the batteries that power EVs. As the global transition to a clean energy economy continues, the demand for lithium is expected to rise exponentially, to the point of creating a supply shortage in the coming years. While the metal itself is not in short supply, there are limitations to the extraction process and investment in the space has yet to catch up with the rise in demand.

In the last two years, lithium prices have soared more than 700% as sales of EVs have hit record-breaking numbers. Demand for lithium, according to McKinsey & Co., is expected to increase more than sixfold to 3.3 million metric tons in 2030 from 0.54 million metric tons in 2021. Supply is currently projected to reach 2.7 million metric tons by 2030, leaving 0.64 million in demand unaccounted for. The lithium mining industry today resembles an oligopoly, with only a handful of companies responsible for the majority of global supply. Going forward, this could change as further investment is made into the space, which could in turn help normalize price levels. While mining is often thought of as the polar opposite of sustainability, lithium mining actually helps further green energy initiatives, and lithium-related investments may serve ESG-focused investors well over time.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Q1 2022 Market Insights Video

This video features an in-depth analysis of the first quarter’s performance by Marquette’s research team, reviewing general themes from the quarter and risks and opportunities to monitor in the coming months.

 Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

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For more information, questions, or feedback, please send us an email.

Could Conflict Spur an Energy Revolution?

Now one month into the Ukrainian crisis, investor concerns about the knock-on effects of war, higher energy costs, and generally prolonged, heightened inflation have hit a crescendo. Europe’s natural gas benchmark, the Dutch TTF, has been extremely volatile, at one point spiking to more than ten times last spring’s levels. The European Union relies heavily on Russian natural gas. According to the International Energy Agency, in 2021, the EU imported 155 billion cubic meters of natural gas from Russia, comprising roughly 45% of European Union gas imports and close to 40% of total gas consumption. Russia’s invasion of Ukraine has underscored the risks of Europe’s dependence on Russian gas imports and prompted the European Commission to take action.

Beyond halting approval of Nord Stream 2, a set of offshore natural gas pipelines from Russia to Germany, at the outset of the conflict, the European Commission has now vowed to curtail the EU’s usage of Russian natural gas, with a target of reducing imports by two thirds by the end of the year. To make up the difference, the Commission will increase gas and liquefied natural gas (LNG) imports from other countries and phase in alternative gases like hydrogen and biomethane. The U.S. has answered this call, with the Biden administration authorizing additional exports of LNG from two major facilities on the U.S. Gulf Coast. The Commission is also looking to accelerate the transition to renewable energy. In particular, the EU will accelerate its “Fit for 55” rule, deploying a massive campaign of electrification, expansion of renewables and electricity storage, development of green hydrogen tech, and investment in energy efficiency measures. While these longer-term initiatives will take several years to come to pass, the composition of energy sources, at least in Europe, should have a stronger, greener future as a result.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Rising Possibility of Recession

Over the last several weeks, the risk of an economic downturn in the United States has increased with inflation continuing higher, Russia’s invasion of Ukraine triggering unprecedented sanctions, and the Fed beginning its rate hiking cycle. While inflation and the anticipation of rising rates have been driving markets for several months, the invasion of Ukraine in February and the resultant economic sanctions on Russia have added a new dynamic to the equation, driving up commodity inflation and making the Fed’s job of controlling pricing pressures without triggering an economic slowdown even trickier. With many U.S. stock indices dipping into correction territory this year, every new data point and indicator will be heavily scrutinized.

In this newsletter we examine these dynamics and try to provide perspective as it relates to the current market environment.

Read > The Rising Possibility of a Recession

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Life During Wartime: Assessing the Market Impact of the Russia/Ukraine Conflict

Recent days have seen an escalation of political tensions in Eastern Europe, and on February 24th, Russian forces began conducting large-scale military operations in Ukraine. These actions have drawn widespread condemnation from the international community, with NATO repositioning troops along its eastern flank and both the United States and European Union announcing intentions to impose sanctions on a variety of Russian financial institutions. The conflict has also threatened the stability of global markets, particularly those areas of the world economy that are most sensitive to energy and the performance of emerging market countries. The aim of this newsletter is to assess the ramifications of Russian actions vis-à-vis the broad market and determine the potential implications of further escalation of the conflict going forward, including:

  • Equity index performance
  • Index exposure to Russia and Ukraine
  • Commodity market expectations
  • Central bank policy and inflation impacts
  • Historical impact of similar exogenous shocks on equities

Read > Life During Wartime: Assessing the Market Impact of the Russia/Ukraine Conflict

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.