Diesel Export Ban May Be Good for U.S.; Fed Predictions; My 3 Energy Stocks

Let’s look at how diesel export bans could help U.S. pricing, how we’re still feeling global pain from the Iran war and China’s export restrictions, and my views on the Fed meeting today.

Since we mentioned diesel on Monday, it seemed like a good place to start.

After the initial attacks on Iran, China put export restrictions on a variety of refined products. That wreaked havoc with global markets, with Asia particularly hard hit. While not every declaration of “force majeure” in the region was directly tied to China’s actions, but it didn’t help.

It is bad enough to expose yourself to “cheap” energy products from an unstable/risky Middle East, but depending on China has its own set of problems. Just like the U.S. felt the pressure on processed and refined rare earths and critical minerals (and is doing more about it), Asia felt China’s hand on the scales of their economies in a bad way. And they could do little about it.

Energy Trade

I continue to like and own BP (BP) and Shell (SHEL) American depositary receipts, the State Street Energy Select Sector SPDR ETF (XLE) and some international funds and exchange-traded funds.

Also, Australia is announcing its first new refinery in 60 years and spending more on oil exploration than they have in at least a decade.

The U.S.’ banning of diesel exports should help drop prices in the U.S. (I will give the benefit of the doubt to the administration on this one). Though how quickly prices would drop, would depend on how quickly the ban takes effect and what it encompasses. Full suspension of the Jones Act would be required (again) – currently it is on a shipment by shipment basis.

Having said that, it should “energize” every country’s efforts to secure their own domestic energy resources.

Much was changed during Covid, but much also fell into a “let bygones be bygones” bucket. It was a global shock and one that the world had little experience in dealing with. It was no country’s fault (other than maybe China’s, but I’m not going to put my tin hat on today).

Cutting diesel exports now might hit differently. It is high, but “shockingly” high? Probably not. Is the price action directly linked to the attacks in Iran? Incredibly difficult to argue with. Has Ukraine’s increased attacks on Russian refiners also added to the price problems with diesel? Yes, to a degree. China’s ongoing restrictions are also hurting. So is there a strong case to disrupt trade deals between companies (or countries) right now? A case so strong that it would not cause a shift in long term behavior regarding the status of these deals going forward?

If the U.S. seriously proceeds with this, expect foreign energy stocks to do very well. U.S. energy companies should continue to do well, as they are global in nature and will in many cases benefit from increased global tolerance to harness and use the resources at their disposal.

The Fed

I don’t think the Fed should hike, for all the reasons we’ve been arguing about for the past few weeks, but let’s assess what is likely. We have a vert small chance of a half percentage point hike. Seems unlikely, but if you want to set the stage for a “one and done” or better yet (in my opinion) a hike that can be undone the moment a deal with Iran is reached and oil prices do come down, there is a certain appeal to this approach. The long end of the yield curve should respond very well. Stocks would likely bounce around trying to get more direction from the press conference.

But we have very high chance of a quarter point rate hike, nearly 93% as of this morning. It’s largely priced in. Bond yields and stocks will need to focus on details, the vote count/dissents and the press conference to get real direction. We have a very small chance of no hike. The long end of the yield curve would see yields move higher almost instantly. Stocks probably rally initially.

Language, Press Conference, Dissents

Ongoing hawkish bias and inflation vigilance and flatter yield curves with front-end yields rising and longer end yields going lower? Stocks would sell off into the close. That’s all a low probability.

A maintenance/pre-emptive hike that’s well explained? If they can include some arguments from the T-Report on why they took this step, but push toward being able to unwind it, rather than cementing it as a first step in a hiking cycle, longer-dated bonds start fading (maybe not today, but in the coming days), but stocks can rally. I give that a medium probability.

But if it’s confusing, and a poorly explained thought process? Then bonds and stocks sell off. I give that a medium probability.

Wild Cards

Warsh seems comfortable with existing balance sheet size. His desire to shrink the balance sheet over time is well known. It adds an “edge” to the market. If he argues along the lines that “now is not the time” or “it is at an appropriate size for current market conditions” or something that should help bond yields a bit. Pushing off the risk of declining liquidity from the Fed would be good for stocks and bonds. Low/Medium probability.

Opening the door to a “Fed Operation Twist.” That would be powerful for bonds and stocks – nearing a “whatever it takes moment.” But, that’s a very low probability. Oh well….

Bottom Line

As much as the market is looking forward to clarity, and getting “what is priced in,” I suspect that by tomorrow there will be more questions than answers and the push to higher yields, across the globe will resume.

We need a breakthrough in the wars, or a slowdown in compute spend (all of which could occur) to take some pressure off of global bond yields, which remain more about supply, than inflation, but the two are linked via the global reconstruction of energy supply chains.

It would be refreshing to see Warsh dissent, but for a hike to go through. Seems unlikely, but would be cool, and probably good for markets.

Good luck as we all spend the time until 2 p.m., second and third guessing our positioning ahead of the Fed. They should really do this announcement and presser in the morning….

At the time of publication, Tchir was long BP, SHEL, XLE.