A Game of Chicken Over Oil

Will Russia cut off energy to price-cap-participating countries? … Russia and Europe face off in a blinking contest … SBF deflects blame but could be facing jailtime … where bitcoin heads now

Russia “will not accept” a new price cap on oil, and is exploring options for how respond.While we don’t know exactly what that means, it’s safe to say it likely won’t improve the global economic situation.To make sure we’re all on the same page, yesterday, the G7 nations and Australia set a price cap of $60 per barrel of oil from Russia. This agreement includes an adjustment mechanism intended to keep the price cap minimally 5% below market prices.This goal here is two-fold…One, keep energy prices high enough to enable Russia to cover its oil production costs so that it will keep pumping and exporting its energy (a European winter without any Russian energy would likely be disastrous) …Two, keep the price low enough to eliminate Russian oil profits, which are helping fund the war in Ukraine.On that note, Ukrainian President Volodymyr Zelenskyy called the $60 price cap “quite comfortable for the budget of a terrorist state.”Here’s more from Zelenskyy:

This money will go not only to the war and not only to Russia’s further sponsoring of other terrorist regimes and organizations, this money will also be used to further destabilize precisely those countries that are now trying to avoid big decisions.

As expected, Russia is lashing out in response, threatening to shut off energy exports to countries that participate with this price cap.From Reuters:

Russia has repeatedly said it will not supply oil to countries that implement the cap – a stance reaffirmed by Mikhail Ulyanov, Moscow’s ambassador to international organisations in Vienna, in posts on social media on Saturday.“Starting from this year Europe will live without Russian oil,” he said…In comments published on Telegram, Russia’s embassy in the United States criticised what it called the “dangerous” Western move and said Moscow would continue to find buyers for its oil.

This is setting the stage for a massive game of “chicken”

Russia needs to sell its energy on the global market to prevent economic implosion. After all, oil and gas account for 20% of the nation’s entire GDP. So, not selling to countries participating in the price cap would be self-defeating.Meanwhile, Europe needs Russian energy. As noted a moment ago, without Russian oil, the economies of those nation’s would seize up like – no pun intended – an engine drained of oil.So, who will blink first?At the moment, it appears Russia is willing to suffer some pain to inflict even greater pain on participating nations.From Russian Deputy Prime Minister Alexander Novak:

We will sell oil and oil products only to countries that will work with us on market conditions, even if we would have to lower production.

The global oil situation is so murky that even OPEC+ decided not to alter its current production policy

OPEC+ met on Sunday and decided to keep its production policy unchanged.You may recall that in October, OPEC+ agreed to cut output by 2 million barrels per day from November until the end of 2023. That’s roughly 2% of world demand.There was some speculation we would see an additional cut at Sunday’s meeting. But as Seeking Alpha put it:

[OPEC+] said there were just too many unknowns to tinker with policy at the moment, such as the G7 oil price cap, recession worries and China easing its zero-COVID policy that has battered its fuel demand.

Speaking of China and its zero-Covid policy, it appears Beijing is in the process of spinning the situation so that it can ease policy restrictions without losing face.From The Guardian:

Coronavirus is weakening and management protocols could be downgraded, an expert on China’s state media has claimed, after unprecedented protests last week led to a major shift in Beijing’s commitment to its zero-Covid policy.Since January 2020, China has classified Covid-19 as a Category B infectious disease but has managed it under Category A protocols, which give local authorities the power to put patients and their close contacts into quarantine and lock down affected regions…But an unnamed infectious disease expert told Chinese media outlet Yicai that more than 95% of China’s cases are now asymptomatic and mild, and the fatality rate is very low. Under such circumstances, adhering to Class A management is not in line with science, Yicai reported on Sunday.

If we do see looser restrictions across China, it will have a major impact on global oil demand, and by extension, prices. A significant portion of the oil price reductions since the summer has related to reduced Chinese demand.Lots of moving parts here. We’ll keep you updated.

Switching gears, disgraced crypto founder Sam Bankman-Fried could be facing jail time

The crypto world is still reeling from the implosion of FTX, the exchange started by Sam Bankman-Fried (SBF).It now appears SBF could be facing jail time.We’ll get to that in a moment. First, it’s interesting to see how SBF is trying to spin his involvement in the collapse of his company.From CNBC:

In America, it is not a crime to be a lousy or careless CEO with poor judgement. During his recent press tour from a remote location in the Bahamas, Bankman-Fried really leaned into his own ineptitude, largely blaming FTX’s collapse on poor risk management.At least a dozen times in a conversation with Andrew Ross Sorkin, he appeared to deflect blame to Caroline Ellison, his counterpart (and one-time girlfriend) at Alameda.He says he didn’t know how extremely leveraged Alameda was, and that he just didn’t know about a lot of things going on at his vast empire.

According to a legal expert interviewed by CNBC, SBF could face three different, possibly simultaneous legal threats:

  • Criminal action from the U.S. Department of Justice, for potential “criminal violations of securities laws, bank fraud laws, and wire fraud laws” (this could include jail time)
  • Civil enforcement action that could be brought by the Securities and Exchange Commission, the Commodity Futures Trading Commission, and by state banking and securities regulators
  • An avalanche of class action lawsuits

As this drama continues to unfold, where is bitcoin headed?

Given that bitcoin is the grandaddy cryptocurrency, its direction remains hugely important for the broader sector.So, will bitcoin’s price prove a headwind or tailwind for the sector in the coming months?Let’s jump to last weekend’s Crypto Investor Network update from our crypto expert Luke Lango:

While all the headlines in the crypto world seem to be focused on FTX and Sam Bankman-Fried these days, crypto traders have moved on surprisingly quickly and quite impressively from that fiasco – and we believe that’s a strong signal of the coming boom cycle in cryptos.After testing and holding its post-FTX support level around $15,700 in late November, BTC surged above its post-FTX resistance level around $17,000 [last Friday].Sure, it’s just short-term price action. But it is notable, given all the negative media attention on crypto these days.

Luke continues to believe the bottom is either in or very close to being in for bitcoin, which paves the way for a monster rally in 2023.He also sees next year’s rally coming from a shift in the macro environment.Back to Luke for more:

Crypto boom cycles tend to happen when rates are going lower and money supply is moving higher.We will have those exact conditions in 2023, ahead of another BTC halving in 2024, which we believe sets the stage for enormous gains in the crypto market next year.

Luke makes an interesting point. If you compare bitcoin’s price with long-term treasury yields, they’re nearly perfectly inversely correlated. So, if yields continue crashing in 2023, it suggests a sharp jump for bitcoin’s price.

Chart showing bitcoin's price and the 10 year treasury yield being closely inversely correlated
Source: Bloomberg

The Final Word on the Incoming Stock Boom

Here’s Luke’s bottom line which will take us out today:

So, forget FTX. Forget SBF. Forget Terra. Forget Do-Kwon. Forget it all.The fundamentals strongly suggest that cryptos are prepping for a boom cycle next year.As opposed to worrying about whether or not SBF is a crook or an idiot, let’s just position ourselves to profit big in the coming 2023 crypto boom cycle.

Have a good evening,Jeff Remsburg

Article printed from InvestorPlace Media, https://investorplace.com/2022/12/a-game-of-chicken-over-oil/.

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