Could crude skyrocket?

By Marius-Cristian Frunza
Weekly Briefs

Space is the final frontier for ordinary people. But, not for Jeff Bezos. The CEO of Amazon plans to fly into space on the first crewed flight operated by the rocket ship made by his space company, Blue Origin. The revolution of electric transport preached by Elon Musk, the other titan of the tech industry, has minimal impact on space travel. Instead, Bezos will contemplate the grass from his backyard through the porthole of his spaceship propelled by fossil fuel. Will fossil fuel prices, including crude oil, skyrocket as Bezos’s starship?  

After the pandemic began, when crude front-month prices dropped below zero, many analysts heard the swansong of fossil fuel.  The switch to green energy and lower turnover in international transport were the two key factors that were supposed to keep oil prices below 40 USD.  Nevertheless, one year later, with several coronavirus vaccines in use, the oil market looks strong. Moreover, except for Q1 2020, China’s economy continued to grow towards a pre-pandemic level, increasing the oil demand. In addition, the opening of the US economy unfolded faster than expected, thereby representing another driver for oil prices.

The shift to green electric transport sold by Tesla seems a good marketing strategy, but its feasibility is far from reality. Electric vehicles represent only a fraction of the transportation fleet covering land logistics and freight. In a nutshell, the economy needs oil more than ever.
U.S. oil producers are still employing only half the rigs they used before the coronavirus struck. In addition, many oil drills closed amid the pandemic outbreak will not be able to be reactivated due to operational issues. Therefore, the maximum potential oil supply is structurally lower compared to 2019. Meanwhile, OPEC and Russia are controlling the global supply in a context of rising demand.

Fear of hyperinflation is another reason investors redirect liquidity from stock markets towards commodities. Commodities have a proven track record of effective hedges against structural inflation. Inflation hedging strategies amid massive monetary mass increase drove up many raw commodities prices, precious metals being amongst the rare exceptions.

Crude oil could easily reach 100 USD before the end of the year. Oil is not only a commodity but also a geopolitical instrument. Thus,  a barrel trading in the three-digit territory could represent a second wind for the economies of OPEC countries and Russia.

What we need to do is always lean into the future; when the world changes around you and when it changes against you – what used to be a tail wind is now a head wind – you have to lean into that and figure out what to do because complaining isn’t a strategy. Jeff Bezos, CEO of Amazon

Market overview

S&P 500, the leading US stock index, climbed this week to a new all-time high. Tech shares, including Amazon, supported the positive trend. The US Labor Department announced that unemployment claims fell to 376,000  from 385,000 in the previous week, thereby representing a new low since the reopening. The consumer price index increased 0.6% last month after surging 0.8% in April. The 12-month CPI increased in May by 5%, the biggest climb since August 2008.  Meanwhile, Bitcoin, the world’s most popular cryptocurrency, is struggling in limbo below 40,000 USD.

Forex:

Turkish Lira

The Turkish lira was, over the past 12 months, the worst performer amongst emerging currencies. Nevertheless, Turkey’s lira recovered last week from a record low after Fitch Ratings and Goldman Sachs predicted that interest rate cuts will be delayed to the fourth quarter.

Focus:

WWE

World Wrestling Entertainment, the world’s leading professional wrestling organisation, is preparing for bigger and better things. WWE’s share rose by 20% amid rumours that the organisation is for sale in the last trading session. Vince McMahon, the architect of WWE’s success, could be ready to step away from this generational business and merge the organisation with other entertainment businesses. UFC or DAZN could be on the list of lucky acquirers. For WWE it is the right move. The pandemic outbreak has a substantial negative impact on the organisation of live events. WWE shows strong financial figures but is struggling with the audience. If WWE merges with another media giant, it could represent the end of professional wrestling, an iconic piece of American culture.

Focus:

GameStop

Meme stocks are counting the days before their inglorious return to the dungeon of penny stocks. Gamestop, the primary beneficiary of the Reddit investing frenzy, lost a third of its value amid several turbulent trading sessions. AMC and Blackberry, the other leading meme stocks followed a similar pattern. An old rule in the investment world teaches us that there is no free lunch. This applies to meme stocks too.

Market outlook

The Dow Jones ended the week above the 34,400 level, while the S&P 500 climbed to a new record high. The following weeks are a make or break point for the stock market, and we could observe a significant summer correction.  

Surprisingly, the world’s leading cryptocurrency survived the week without a new significant dip and remained above 37,000 USD. The market is still turbulent with substantial dislocations. This is not the end of the bearish cycle, and for the moment, there are no signs of an exit from the turbulent zone.  

The Gold ounce ended the week in negative territory below the 1,890 USD, while the Brent crude oil progressed towards 73 USD per barrel. Oil prices show strong momentum.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.