The best hedge - is growth

6 ביולי 2022

INVESTMENT CONTEXT

• In the wake of robust demand despite mounting recession fears, Saudi Aramco hiked its crude oil prices for Asia's market to near record on July 5. In August Arab Light crude price will sit at USD 9.30/boe above the regional benchmark
  
• For the first time since May 11, WTI crude oil fell below USD 100/boe. According to Citigroup, oil price could plunge to USD 65boe by the end of this year, while JP Morgan forecasts oil at “stratospheric” USD 380/boe
  
• On July 5, the ambassadors of 30 NATO States signed Accession Protocols for Finland and Sweden, effectively kicking-off the ratification process, which usually takes one month
  
• Inflation in the U.K. hit a fresh 40-year high, standing at 9.1% in June compared with 9.0% in May. The political stability of the country has come under pressure after Chancellor of the Exchequer Rishi Sunak and Health Secretary Sajid Javid quit the Cabinet, citing divergences with Premier Boris Johnson in the matter of economic policy-making
  
• Prices of corn, soybean, wheat, and several other agricultural commodities fell by more than 20% in recent weeks, largely reverting to pre-pandemic levels as financial players unmounted bearish speculative positions
  
• Italy declared state of emergency for Northern regions facing the worst draught in 70 years, threatening 30% of Italian agriculture output.
  

PROFONE'S TAKE

• Following the considerations about record high electricity prices in Europe, ProfOne's eyes are now set on nuclear plants, the development of which matches well with Europe's ambitious plan of energy transition and reduction of the reliance on Russian gas. Yet, as anticipated by ProfZero, a full-scale energy rotation will take time, and relevant capital investments, to happen. The nuclear plant of Olkiluoto in Finland entered construction phase in 2005 while that of Flamanville in France in 2007; both projects haven't been delivered yet, yet costs already exceeded original budgets by up to 3 times. With that in mind, and recalling that costs of renewable technologies based on solar and wind energy are declining, ProfOne understands why nuclear projects have become less attractive for investors. Nuclear requires the elaboration of new financing models and scaling strategies. Some near-term relief may be achieved through expansion of new small reactors, which are faster and easier to build; yet the vast majority of these assets have not fully come online yet.
  

PROFZERO'S TAKE

• Robin Brooks, chief economist at the Institute of International Finance, aptly summarized what does it concretely mean to change economic paradigm: "Germany's growth model has been to import cheap energy from Russia, use that to assemble manufactured goods and export those goods to the rest of the world". Now that Russian natural gas deliveries are sputtering, Germany has posted its first monthly trade deficit since 1991, and the country has entered phase 2 of its 3-step energy emergency plan. ProfZero prefers to resist the urge of calling for capitulation; after all the country can re-activate coal-fired while it speeds up the construction of much-needed LNG regasification assets. Yet zooming out, the theme of energy independence is what actually is making the whole difference between the U.S. and the EU - and shall be a likely recurring theme for the next growth paradigm of the entire Western world
  
• Seeing crude oil plummeting 10% in one single trading session can only mean that markets are bracing for a recession. Fundamentals don't lie: according to EIA, the world in 2022 will produce more crude oil than it really needs, with forecasted supply at 100.1mboe/d, and demand at 99.6mboe/d. ProfZero points out that one of the virtues of commodity markets lies in price-formation mechanisms strictly tied to basic supply-demand interplay. Sadly, the disruptions in European natural gas are preventing the same from happening; yet should frictions be erased, it is all too rational to expect also TTF to briskly retrace