High Gas Prices: Gouging or Geopolitics?

High Gas Prices: Gouging or Geopolitics?

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Hey everyone. My name is Kyla. Welcome to my channel, where you talk about the stock market in the economy amongst other things. today we're going to talk about commodities.

We're gonna talk about the federal reserve so much happened this week. So I'm going to try and break it all down. hopefully this will be helpful in context of understanding what's going on with oil, the lean prices, geopolitics, of course, China and Russia. And then finally the federal reserve. This video is brought to you by asset dash, stop checking, multiple investment accounts and crypto wallets and track everything in one place.

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if That sounds useful to you check out the app in the description box below, this is not investment advice. getting right into it, oil. Oh my gosh, what a week? So what a rollercoaster from negative in March of 2020 to wildly swinging between less than a hundred dollars a barrel this week to more than $120 a barrel and back again, because why not do it twice? twice is nice, odd ocelots interviewed PIRE, who is a very famous oil trader and manager hedge fund manager.

and he thinks that oil will get up. To over $200 a barrel by the end of the year. And he said that there are basically a few things going on.

So this Russian oil that we have sanctioned is essentially lost and that's going to be reflected in prices. And number two, shell producers and OPEC have drastically underinvested for many years and it'll be pretty difficult for them to ramp back up. He also points out that a lot of us oil has been old and there's some supply, but it's not like this golden river of oil. That's just free flowing. it's important to invest in alternatives now. And the other thing that I, you know, touched on last week is these shale share, oh, that's a tongue twister.

These shale shareholders really want money. The shell companies are gonna, you know, listen to the shale shareholders because they burned the shell companies dead burned 600 billion last time. And they've got to keep that financial liquidity SPI it right open. and so investors are essentially saying to them, you know, make us money, but don't make oil ha ha. Which is just so silly. you know, super awesome of them.

and to give you a little bit more insight oil industry, because prices are so high oil execs are like, I think prices are gonna. Stay high and they're removing some of their hedges. basically guard down hopes up that oil is going to stay high from a long term perspective.

This kind of sucks because it can result in less liquidity and fewer checks leading to more volatility and potentially bigger rallies according to Bloomberg. So it's kind of making these big bets now at the expense of stability down the road. And you think that they had learned their lesson, but heck no.

Why would they learn? SHA is not really producing. We're still trying to find alternatives and oil is expensive. And that gets into this idea of demand destruction, where it's just incredibly costly to get oil. And so people are like, yeah, maybe not no oil or, uh, you know, I won't get gasoline.

And so that. Bites into demand and then there's less need for oil production in general. OPEC has already missed their target by over 1 million barrels per day. So things could get even more expensive on that. And of course, Russian oil is just a really big component of global markets.

R Johnston is like one of my favorite people on Twitter. He has a really great newsletter. He has a really great Twitter. Super insightful to follow because he goes really deep into the data of oil.

So if you're like down with the data, highly recommend that you check him out. he outlined how a breakout of Russian oil looks showing how much of their supplies at risk and what the loss of Russian oil looks like. So PIRE estimated that Russia would. Uh, sanctions removed 4 million barrels a day from the markets and the world consumes about a hundred million barrels of oil per day. So that loss is rather significant. but Russia is still able to make money on the back of this.

So a lot of Asian countries are still buying Russian oil, which I'll talk about a little bit later. And of course, Europe is still pretty energy dependent on them. And so some money flows for sure, for Russia out of this oil is pretty complicated. There are different grades, different production ramp up the whole supply chain from refineries to processing, et cetera. It's not as easy.

It's just like pressing a button and more oil comes out one day. one day hopefully no more oil, but right now we definitely need, it gets into gas prices cuz so everybody's zooming around in their car. Right. And everyone, unfortunately. You know, knows that oil has been swinging around a lot lately. Cuz all you have to do is walk to a gas station and look at the price.

when oil prices increase gas prices increase too. But when oil decreases gas prices don't and this is commonly called out on there's a lot of tos right now. Price gouging. Right. and please, no, this is not me sticking up for the oil industry.

I'm just saying what it is, but there's a really good research paper called do gasoline prices respond asymmetrically, accrued oil price changes. And a key point in the paper is if a consumer uses 10 gallons of gasoline per week, a 5 cents per gallon increase in crude oil prices. So about a $2 I 10 cent increase per barrel cost a consumer, a dollar 30 more over her life than a 5 cents.

Decrease safer. This asymmetry implies that variability in crude oil prices, even if there's no systematic increase or decrease in price, it's costly to consumers. So that variability point is important.

So the variability is costing people quite a bit. and we've had a lot of variability recently. Right? So there's several other research papers that make kind of the same point. So things go up pretty fast. but it come down really slow. There are several other research papers that make the same points.

things go up fast, but come down really slow. As Matthew rode on average retail prices rise three to four times. As fast as they fall brand gasoline features significantly more asymmetry compared to unbranded gasoline in response to the changes in the rack price. So pricing is just kind of a weird thing.

It's a combination of market power from gas stations, because gasoline is an, an elastic good fear of variability. So if prices go up again, they don't wanna be caught on the wrong side of that. And feather and rocket. So gravity works in reverse for the gasoline industry and across all prices. Really.

So president Biden tweeted out oil prices are decreasing in gas prices are, should do. Uh, and clearly he has not read the peer reviewed studies on this matter. Garrett golden, a Dallas fed energy economist had a great breakdown of what happened to gasoline prices and oil upon invasion. highlighting that invasion data.

So 5 24 oil prices were $92. Average gas price was $3 and 57 cents on March 15th. When oil went back down after rocketing up oil prices were around 96. Right now they're around, um, like 1 0 7, 100 so much lower than they got up, like way up to like 1 25. and the average gas price ice is like 4 31.

So a whole. Almost a whole dollar more, and gas prices are going back down, but still like quite high. And so why is there a gap? So like, why is crude going back down, but gas prices aren't. So Garrett did a really good thread on this and basically it's, as he wrote, it's the manner in which the business of gasoline distribution operates, where there's always a lag between oil prices and pump prices at the recent peak w two I prices close 30% higher.

Than pre-war levels on March 8th, but retail gas was just 19% higher. So it's not a one to one move usually. and there's like a couple of complications to it. So refiners acquire crude and turn into fuel. And then that's sent to service stations and distribution facilities, et cetera, and that all cost money.

like when we think of WTI crude oil, that's not like what goes into our cars that has to be refined and, and processed. And sometimes it's not even w two, I sometimes it's Brent and other types of grades. And then the second point is when oil first shut up, it took about two weeks for that to be reflected in gas prices, but now crude has dropped and that hasn't so gas stations are just super low margin.

they make most of their money from snacks. Like they don't make a ton of, money from the gas stations themselves. Most of them are small franchises. They're trying to maintain origins.

it's also this variability point, they don't wanna drop prices. Cuz oil could jump again. Like it's kind of been doing. And another interesting thing with oil is that the markets themselves, so the crude oil markets themselves are kind of drying up as Javier bla wrote the commodity market continues to trade largely on value at risk and margin and initiation and radiation rather than supply and demand.

So it's the market making moves, not really moves making the market and things are kind of. Messy because of that. and it gets even worse. Uh, the European Federation of energy traders is now asking for emergency liquidity because these high and volatile wholesale energy prices are leading to intolerable cash, liquidity pressure for energy market participants and liquidity support should be provided. They say, so the commodities are asking to be backs, stopped by banks, which is just like a whole thing. that is wild.

That's going on and that's the whole conversation to be had because like, what does it mean for the fed to intervene here? It would be Europe. Right. But what does it mean for essential bank intervene in, in commodity markets I think it's funny, cuz like people will be like, how did these markets get so fragile? And it's like, how did you let one dude accumulate a massive short position in nickel? A like, ah, Man. Oh man. the central bank's role could become even more outsized.

And this is interesting too, because Sarah bloom Raskin lost her fed opportunity because some politicians were like, she cares a little bit too much about making sure that our earth is livable in 20 years. And we don't like that, but that gets into the whole green energy policy without green energy investment thing. So Sarah bloom Rascan has been very big advocate of, you know, not giving financing to fossil fuel companies. And politicians are like, Ew, that's disgusting to us. And the thing is fossil fuel companies need financing.

They do this war has made it very clear that we are not, not reliant on oil and that we cannot get by under green energy. And so that's like Sarah bloom, Raskin lost her fed spot because. They were worried that she was going to overstep her bounds and really focus on climate. Right. And they were like, no, you need to focus on being a fed member.

but now you have the fed potentially intervening in commodity markets. So it's like, okay, is that an overstep? Like what, what. What really are the rules of the fed. and that'll be interesting to see where that power line ends and begins.

And I think this question has become, gonna become like pretty important. pretty soon it's already important, but so let's look at this from a global view, the geopolitical potato. India is buying Russian oil. India also relies on Russia for about 60% of their military equipment.

Their former ambassador to Russia said this is not a fight. We have created showing his frustration with the global conflict. And so Russian exports to India have almost four X in the past month. The purchases don't violate sanctions mostly because Russian oil.

Is a big discount and India consumes a lot of energy. That's why they're buying it. They're planning to create a Ruby Rubal trading mechanism. they're planning to buy even more of it. . And then there's China. So China imports 25% of their oil from Saudi Arabia.

And the two are now, like, what if we price this oil in one, eh, which gets into the whole, like, what's going to happen with the us dollar. I talked a little bit about Saudi Arabia us last week, but basically Saudi Arabia and the us. Do not get along., China has been hardcore flirting with Saudi Arabia, helping them build different things, investing in a city that MBS is building and more, but everyone is like on this whole dollar, won't be reserved currency anymore, which is definitely a thing to discuss.

And, and this is relevant to China and Saudi Arabia because they're planning to price this oil one. and countries are watching Russia get slammed with sanctions because they invaded their neighbor. It ties into the USD a little bit because all these countries are like trying to rotate away from the us D And like I talked about that last week as well, trying to conduct less global trade in us D but 80% of all oil sales are in USC, according to the wall street journal.

So there's really like. Two things here. China's oil sources, Russia, Iraq, Angola might want a UN dominated trade system.

So they get away from the weaponization of USC and that could put pressure on the power dollar, but China's currency is not the most stable and reliable currency. They But China, can't go messing up the relationship. With the west right now.

And they broadly know that, this was written in Bloomberg, Western capital and technology are essential to China, despite recent efforts to make the country more self sufficient foreign direct investment topped 1,000,000,000,001 last year with about a third, going to, into high tech sectors, Chinese commerce, and then Ian Brimmer summarized it pretty well. I don't agree with all his stakes, but I thought this was a good summary. China will continue to sit on the fence, maintaining normal trade relations with Russia, where sanctions allow it while refusing to directly come to Putin's aid, to avoid decisive breaks at the west. So basically China could go down with Russia or they could become best buddies and like make this whole thing a lot worse. And David fling had a pretty good thread on dollar, one relations.

sort of highlighting Euro dollars. So this Swiss Frank and Canadian and Australian dollars are used in more effects transactions cross border claims in China are mostly dominated in dollars. So about 86%.

it can't really become the reserve currency, cuz it's just not used that much. And it's mostly the Euro dollar that matters here. It's the instrument that facilitates straight. And as David highlights, the closest thing the world has to unregulated global finance. He also called Euro dollars the crypto of their day, which I thought was kind of interesting , so what's going on with the Rubal Russia. So everybody was like, well, Russia, default.

And they didn't, uh, Russia paid their coupon on their bonds to JP Morgan. They paid in us D then paid out to bond holders and do they're looking to issue digital financial assets, which is super interesting for sure. The us is discussing banning Russian imports of uranium into the us, which is another tool in the Russian economic sanction tool kit. But one that is interesting because Russian Uran makes about 16% of us purchases, most of which go to nuclear reactors. And there's a few different.

It's cool to thought specific to this. I think we need that uranium. We do for the nuclear reactors. that's sort of like this broader scope of sanction effectiveness, which I talked about a little bit last week. how does all of this hurt Russia? And does it hurt the country's sanctioning Russia more? And is that good or bad? how impactful.

Do the sanctions need to be in order to be worthwhile and not drain the west of all the resources that they have while still clearly supporting Ukraine. And then we need to wean off Russia in general. Like we probably shouldn't be using Russian energy supplies, especially considering their desire to invade and domestic production. So I talked about this last week as well. Like there's, this is just going to be a big theme, I think over the next few years where you have a lot of reassuring of production, where countries are going to focus on having their own physical stockpiles and access. And that will make things even more expensive.

cuz we've gotten super used to this concept of globalization, but that only works if countries are mostly nice to each other. . And so another thing on this, effectiveness of sanctions, so Iran apparently built out an entire system to avoid sanctions. So sanctions might, might not be the end. All things, things that we thought it was, Iran sanctions are different in Russias, but things get sneaked around, especially.

When energy markets are in the picture. As the wall street journal wrote, the system provides Iran, the revenues and imports. It needs to keep its economy and country running at Monte suppress on the country's currency by giving their Iranian and economy access to the dollars euros and other reserve currencies in which world trade is dominated. According to diplomats in officials and the Russian sanctions are just kind of confusing. Like they seemed to be able to do almost everything like the fact that they were able to not default on debt is like, wow.

Okay. So they're doing all right. Probably.

Mm. the sanctions are working broadly, but Russia is still operating just like with one hand tied behind their back with a very loose rope. Right.

and it seems like their BFF, China has been a little bit confusing too. So China, China has been really interesting. Piece in this overall geopolitical chess puzzle, because they don't really wanna pick a eye. They've been pretty clear about that. They're trying to maintain a relationship with both Russia and the us a task that will become increasingly impossible as time moves forward. and they like talk today with Biden and thinks seem okay, but China to needs energy.

In natural gas and they're going to find sources for that no matter what. And they had an optic in COVID, so they shut down a lot of city supply chains, et cetera, and then regulations. So their Chinese internet tech sector got clobbered because us regulations. So the us is like, Hey, we need to regulate you. If you're gonna be listed on us exchanges as an ADR, you have to comply. And they're like, Maybe not right now.

so you're gonna get in trouble for that. And then China regulations that China has cracked down on the tech sector. I talked about this before and every time they do it, everyone's like, why would, what? This is so new and they do it so often.

They were gonna maybe nationalize more companies, which would be bad. A regulation took 660 billion off the market cap of Baba, for example, and us shareholders own quite a bit of China. China has noticed that stating that they would make regulation more transparent, reduce the economic impact of COVID zero and support the market with all there might, and then China's a huge portion of the EEM, which is how a lot of investors get exposure to emerging markets.

that's gone kind of poorly. so everyone, you know, for a few days was like, China is uninvestible when it was going down, because of like the worries of regulation de-listing et cetera. But all China had to do was say, like, don't worry, ask. Stuff in, we're gonna freaking fix this. And then all of a sudden the stocks became ridiculously cheap quote unquote.

so it feels a little bit to me like playing poker with your cards, showing and pretending that you're being strategic, but who knows? Remember ever grand, for example, there's more where that comes from More than half of debt from developers is trading below 50 cents on the dollar, the real estate markets, as a mess, as Adam two's wrote the overwhelming majority of China's household wealth is in real estate and those markets are just not like and good. So let's talk about the fed. I can't believe I waited till the end to talk about the fed, but they did it Hawks a last, the fed raised by 25 basis points.

And we'll hear more about the balance sheet in may. They're expecting to raise rates at every meeting this year, which is a lot like they're moving and gro. I think it's helpful to bucket this in short and long term. So short term, 2022, they're gonna raise rates maybe seven times this year and likely shrink the balance sheet, which will be equivalent to about One rate hike.

As Joan Powell said, the fed made it super clear that their whole thing was going to be fighting inflation. And that would come at the cost of everything else because. Price stability is the root solution to everything, including the labor market, the yield curve inverted, because it was like, you really think that you can raise rates this much and not have things melt in some corners of the economy.

And then getting into the long term. This is their summary of economic predictions, and basically they see GDP growth slowing a bit into 2024. So about 1.8% with the unemployment rate, staying studied around three.

Three and a half to 3.6%, but inflation is expected to be 2.3% into 2024. And by the end of 2023, they're expecting the feds funds rate to be above their neutral rate, which is neutral rate is where monetary policy is either expansionary nor contractionary. Yeah. I like how Adam said it. This is somehow both hawkish and yet still too active mistake, basically. They're like we can come in like F. F the S up of everything we can come in and we can

just like muck it up. And, everything's gonna be cool. we've had record low interest rates for a super long time. Nobody will notice that we raise them seven times this year things will be fine. It's just like, is that reasonable? Like, are you, are you sure? And like maybe Matt Klein had a good point about it, but policymakers can choose whether or not temporary disruptions and production and consumption have to lead downturn.

The question becomes to how much inflation people are willing to tolerate how excessive the inflation is, and how people start to respond accordingly. if like I'm not doing anything, cuz things are so expensive, we're gonna have a recession. And like, I don't know, like my grocery bill, man. Ooh. It's getting tough out there and I don't even drive. factoring all of that into the average American budget.

It's it's brutal. so it's like, how can you still encourage growth and, and spending, and will the economy revert to the mean, do we need to have a full moment? I'm not sure. And there was a title in Bloomberg I thought it was kind of funny cuz it was like the fed is basically just guessing and it's like, yeah, that's monetary policy.

It's a giant guess. of course. of course they're guessing monetary policy is mostly slam poetry with a little bit of bank nudging. It's kind of like touching the over to see if it's hot, you just start starting the notch and you can feel the heat, but you have to temperature. Check it to see if you're gonna, if it's working and yeah, you're probably gonna burn keep untouch in this. Stove.

And that's kind of how monetary policy operates is you keep on turn that dial and then eventually it, it comes, it becomes too hot to touch. it burned. Rick, who is the global fixed income CIO of BlackRock. He has a Twitter. he said that high prices tend to be.

Get a cure for high prices. And that gets into this idea, demand is destruction. And I think that's what the fed is relying on too.

They also said that the labor market was unhealthy. I really liked Dr. Julia's views on the labor market. Give me a labor market where I have to fight to keep my employees, pay them, train them, treat them as human beings. And I think that's a really important point where it's really easy to say, you know, wage growth, whoa, like that's so bad, it's too fast, but it's also important that employees are valued and treated properly. . But perhaps they can keep growth high, perhaps, you know, a backdrop of geopolitical and resource uncertainty.

It's not like they have perfect answers. They're really just guessing, but it's an educated guess. And one that they think makes sense and us mortgage rates are back up to 4%. So they're managing something, I guess. yeah, so that's kinda, what's going on everywhere.

I have some extra links in the sub stack. If you wanna go check them out, just like things that I wanted to talk about, but ran out of time, in the paper and then ran outta time in the video and trying not to Blaber on forever, but yeah, thanks so much for hanging it out. Thanks so much for spending time with me. couches are great furniture items, big fan of them.

Yeah. I hope you all are doing well. And I'll talk to you soon. Bye.

2022-03-21 23:28

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