David Fuller and Eoin Treacy's Comment of the Day
Category - Energy

    House Sales Collapse as UK Lenders Withdraw Mortgage Offers

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Deals for house purchases are collapsing after lenders pulled mortgage offers in response to soaring interest rates.

    Smaller lenders such as Kensington, Accord Mortgages and Hodge were among those to say they were withdrawing products Tuesday. That follows the decision by Lloyds Banking Group Plc -- the UK’s biggest mortgage provider -- on Monday to halt some offers, while Virgin Money UK Plc temporarily stopped offering home loans to new customers.

    Major firms weighed in later Tuesday. HSBC Holdings Plc told brokers it was removing new mortgage products for the rest of the day while Nationwide Building Society announced that it was increasing rates across product ranges starting Wednesday. Banco Santander SA said it was removing some products and increasing rates on many others.

    Jessica Anderson, a 33-year-old who works in publishing, was set to buy a house in Walthamstow, east London, with her husband until the seller pulled out last week.

    “We’re in an uncertain position where we’re not sure whether it still stands,” she said, regarding the couple’s mortgage offer. “Since the approval there have been two interest rate increases.”

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    Putin Raises Gas Pressure as He Moves to Annex Ukraine Regions

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Russia threatened to cut off the last gas pipeline to Ukraine’s European allies and moved to annex a large chunk of Ukrainian territory amid a string of military setbacks in the seven-month-long war.

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    OPEC, SPR May Make $80 the New $60 for Oil

    This note from Dow Jones may be of interest.

    Tightly managed supplies by the OPEC-plus group and signs Washington will start restocking crude siphoned off from its Strategic Petroleum Reserve if oil falls to $80 suggests oil prices will stay relatively high despite a global economic slowdown, BofA Global Research says. "As spare capacity dwindles and capex lags, we think $80/bbl is now the new $60 for Brent crude oil," it says in a note. "Said differently, the 'OPEC-plus put' on average oil prices is higher today." It adds that a recent signal by OPEC-plus to reduce production even as oil traded above $90 was unprecedented, and a good indication it'll do what it takes to keep a floor on prices.

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    Germany Tightens Control Over Industry With Russian Oil Grab

    This article from Bloomberg may be of interest to subscribers. Here is a section: 

    Germany seized the local unit of Russian oil major Rosneft PJSC as Berlin moves to take sweeping control of its energy industry, secure supplies and sever decades of deep dependence on Moscow for fuel. 

    Alongside its move for the Rosneft unit, Chancellor Olaf Scholz’s administration is in advanced talks to take over Uniper SE and two other major gas importers, Bloomberg reported on Thursday. Germany is pressing ahead with an historic overhaul of its economy just two and half years after the Covid-19 pandemic, grabbing control over a huge chunk of its industrial base to prevent shortages and blackouts this winter. 

    A decision on the next moves could come within days. The need for action is urgent with Uniper losing 100 million euros ($99.7 million) a day as it tries to replace Russian gas to maintain deliveries to local utilities and manufacturers.

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    The Future of Copper

    Thanks to a subscriber for this report from S&P Global which may be of interest. Here is a section from the conclusion:

    Notably, neither scenario assumes that the growth in new capacity—expansions and new mines—speeds up. Absent a major policy shift, however, regulatory, permitting, and legal challenges, combined with long timelines for new mines to come onstream, will continue to dampen the pace of supply increases. This supply-demand gap for copper will pose a significant challenge to the energy transition timeline targeting Net-Zero Emissions by 2050. The challenge will be compounded by increasingly complex geopolitical and country-level operating environments. These include

    The strategic rivalry between the United States and China—over a projected period in which China will remain the dominant global supplier of refined copper, while the United States depends on imports for well over half its copper.

    Russia’s invasion of Ukraine and its cascading effects on the commodities markets and energy security, which have highlighted the vulnerability of supply chains. “Supply chain resilience” policies aiming to secure reliable supplies of the materials needed for energy transition—and economies in general—are likely to be a central feature of the emerging geopolitics.

    A growing tension between energy transition, social license, and ESG objectives that dramatically increase the need for minerals like copper on one hand, while raising the compliance, legal, and operational costs of mining those minerals on the other.

    The risk of a significant, structural increase in copper prices as the supply-demand gap increases, with a potentially destabilizing impact on global markets and industry. While structurally higher prices incentivize international investment in new capacity, governments in sourcing countries are likely to seek to capture domestically a rising share of revenues.

    The fragmenting of globalization and a resurgence of resource nationalism. The resulting challenge for all actors involved with the energy transition will be to manage often competing and seemingly contradictory priorities. It is clear that technology and policy innovation will both be critical to reducing the supply-demand gap for copper in order to help enable the net-zero goals

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    The Coming Global Crisis of Climate Policy

    This strident article from the Wall Street Journal may be of interest to subscribers. Here is a section:

    Politicians are happy to blame Vladimir Putin and his Ukraine invasion for the current energy disaster. But what transformed that one-off shift in the relative price for energy into a global disaster was two decades of green-energy policy beforehand. In Europe, that includes a fixation on renewables incapable of powering industrial economies absent battery technologies that don't exist, a refusal to tap domestic fossil-fuel reserves such as shale gas, and a deep and irrational hostility to nuclear power in many parts of the Continent.

    This has created an energy system of dangerous rigidity and inefficiency incapable of adapting to a blow such as Russia's partial exit from the European gas market. It's almost inevitable that the imminent result will be a recession in Europe. We can only hope that it won't also trigger a global financial crisis.

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    Greed & Fear Negative SPX, Sees $130-$150 Oil Price

    Thanks to a subscriber for this note summarizing the recent Raymond James Conference presentation by Christopher Wood. Here it is in full:

    A few key takeaways (ask for replay)
    a) has been negative USA , SPX P/S still very expensive at 2.5x, US M2 has risen by 40% in absolute terms since March 2020 (annualised rate of 15%), has slowed to an annualised rate of just 0.6% in the six months to July.
    b) USA CPI ex-energy has been flat, while headline CPI down (due to oil price)
    c) we see OIL price rising back to $130-$150, which would mean inflation expectations would rise too (0.80 correlation)
    d) fossil fuel still 82% of global energy consumption
    e) reminder EM equities vs US dollar index : 0.72 negative correlation
    f) Indonesia has been our favorite market this year, credit growth rising
    g) China property market woes outweigh infrastructure stimulus
    i) we are neutral China
    j) if YEN breaks 150 and we see 3% inflation in Japan, then base case is focus will be put on defending further Yen weakness
    k) YEN is cheapest since 1971
    l) India remains our favorite market on a 10 year view , we are heavy financials & property in India, housing affordability good
    m) very underweight Australia (though + energy). Negative Australia housing as interest rates rising, home price declines accelerating

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    Energy Trading Stressed by Margin Calls of $1.5 Trillion

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Aside from fanning inflation, the biggest energy crisis in decades is sucking up capital to guarantee trades amid wild price swings. That’s pushing European Union officials to intervene to prevent energy markets from stalling, while governments across the region are stepping in to backstop struggling utilities. Finland has warned of a “Lehman Brothers” moment, with power companies facing sudden cash shortages. 

    “Liquidity support is going to be needed,” Helge Haugane, Equinor’s senior vice president for gas and power, said in an interview. The issue is focused on derivatives trading, while the physical market is functioning, he said, adding that the energy company’s estimate for $1.5 trillion to prop up so-called paper trading is “conservative.”

    Many companies are finding it increasingly difficult to manage margin calls, an exchange requirement for extra collateral to guarantee trading positions when prices rise. That’s forcing utilities to secure multi-billion euro credit lines, while rising interest rates add to costs.

    “This is just capital that is dead and tied up in margin calls,” Haugane said in an interview at the Gastech conference in Milan. “If the companies need to put up that much money, that means liquidity in the market dries up and this is not good for this part of the gas markets.”  

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    Entering The Superbubble's Final Act

    Thanks to a subscriber for this article by Jeremy Grantham. Here is a section:

    My theory is that the breaking of these superbubbles takes multiple stages. First, the bubble forms; second, a setback occurs, as it just did in the first half of this year, when some wrinkle in the economic or political environment causes investors to realize that perfection will, after all, not last forever, and valuations take a half-step back. Then there is what we have just seen – the bear market rally. Fourth and finally, fundamentals deteriorate and the market declines to a low.

    Let’s return to where we are in this process today. Bear market rallies in superbubbles are easier and faster than any other rallies. Investors surmise, this stock sold for $100 6 months ago, so now at $50, or $60, or $70, it must be cheap. Outside of the late stage of a superbubble, new highs are slow and nervous as investors realize that no one has ever bought this stock at this price before: so it is four steps forward, three steps back, gingerly exploring terra incognita. Bear market rallies are the opposite: it sold at $100 before, maybe it could sell at $100 again.

    The proof of the pudding is the speed and scale of these bear market rallies.
    1. From the November low in 1929 to the April 1930 high, the market rallied 46% – a 55% recovery of the loss from the peak.
    2. In 1973, the summer rally after the initial decline recovered 59% of the S&P 500's total loss from the high.
    3. In 2000, the NASDAQ (which had been the main event of the tech bubble) recovered 60% of its initial losses in just 2 months.
    4. In 2022, at the intraday peak on August 16th, the S&P had made back 58% of its losses since its June low. Thus we could say the current event, so far, is looking eerily similar to these other historic superbubbles.

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