Three Key Industries to Watch This Week
These areas could define much of what happens next with the economy and the markets.
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Don’t take your eyes off diesel, credit and the semiconductors. These are what will determine the next few weeks of market moves. Related to those three, watch fertilizer, Iran, Russia, Ukraine, shipping, and refining. We’ll tackle all of those topics here, starting with energy.
Making Sense of Oil and Gas Prices
With Brent futures hitting their highest level since May, it is impossible to ignore what is going on with oil and gas prices. To be honest, my “go-to” commodity contract is with Low Sulphur Gas Oil futures, as it ties most closely to diesel, which is the real problem, along with LNG and fertilizer, related to the Strait of Hormuz.
There has been very little relief in this contract, despite recent efforts to get diesel prices lower. We have a lot of “chatter” about more oil flowing out of the Middle East now than before the war started. But prices are still high. What’s going on?
In a nutshell here is how I interpret the info: First is that bypasses and workarounds are getting a good percentage of the oil that once went through the Strait onto the market. That’s good. Second is that Strait Traffic Trackers understate how much oil is making it through the Strait as ships run at night, without transponders. Also good. Third is that Iranian oil flows have slowed to a trickle. Most of the oil it had at sea, outside the Gulf, should have been offloaded by now. The U.S. blockade is working extremely well. Without Iranian oil flowing to China, there is less oil on the market and China has to bid up oil in “normal” markets. Good for clamping down on Iran, bad for the price of oil. Fourth, it is unclear that the flows of LNG, diesel, other distillates, or fertilizer, have returned to anything close to pre-war levels.
What we do know is the cost of shipping is much higher. Longer routes (remember, the bypasses take more time, increasing the cost and time to market) and higher insurance costs add up. Check out the exchange traded fund Breakwave Tanker Shipping (BWET) to see the shipping cost change, and then the still high price of oil makes sense. Bad.
Until there is some sort of a deal in the Middle East, it is difficult to see the energy complex getting cheaper any time soon. A deal between Russia and Ukraine would help, but the key is the Middle East. In any case, it will take months after a deal for the supply chains to “normalize.”
Credit: Cheap, But Getting Cheaper?
My sense is every major player I talk to wants to buy credit as it “looks” cheap here. But they are scared it gets worse before it gets better.
Keep an eye out on the warning flags I discussed last week and in my TipRanks interview.
Semiconductors
I remain wary of this space, primarily because of the amount of leveraged (“mechanical”) money linked to it, with the ETFs just the tip of the iceberg. We sit on a key technical level, which should provide a bounce, but I think the risk is breaking it to the downside.
This brings us back to a technical level.
It seems almost impossible to believe that the last time it broke this level was in the aftermath of “Liberation Day.” What looks like a tiny blip on the chart is actually a 30% drawdown! It looks like a tiny blip because 18 months ago, the index was at less than 5,000 and it is just below 11,000 now.
Bottom Line
On energy prices, we need to see a positive resolution in the Middle East. Everything else seems like, more or less, a rounding error.
The amount and cost of the compute spend remains the key driver for credit spreads, equities, and the economy. We will get bits of information from earnings, and maybe more importantly, from the market reaction to those earnings.
If anything, I’d argue that Treasuries are “sniffing out” potential economic weakness, which would fit my cautious view on equities and credit spreads.
I don’t like how credit or the semis are positioned from a technical standpoint.
The entire market is going to be laser-focused on the Anthropic initial public offering.
At the time of publication, Tchir had no positions in any security mentioned.
