The S&P holds a critical level… under-development in the oil and gas sector … why oil prices are headed higher … why are eggs so expensive?
Credit where credit is due…The S&P held a critical technical level last week, and it’s a big win for bulls.We’re talking about the S&P’s 200-day moving average (MA).To make sure we’re all on the same page, a 200-day moving average is a line on a chart showing the average of the prior 200 days’ worth of asset prices. It’s an important psychological line-in-the-sand for investors and traders.When the asset’s price is above the 200-day MA, many traders interpret it as a sign that sentiment is bullish. The bearish opposite is true when asset prices are below this level.Since many trading algorithms base their buy-and-sell decisions on the interplay between an asset’s price and its 200-day moving average, this is an important long-term technical level.Now, in the wake of January’s market strength, the S&P pushed above its 200-day MA.While that was a sign of strength, the big question became “would it hold?”After all, it’s one thing to breach the 200-day MA, it’s another to turn this level – which was formerly resistance – into new support.And that’s what happened last week – and is continuing as I write Monday morning.
February’s weakness pulled the S&P all the way back to its 200-day MA, but it’s now bouncing.Though regular Digest readers know I’m skeptical that a bull market is here to stay, this is certainly a sign of strength – and it’s important to note.Points to the bulls.
Meanwhile, it appears we’re headed toward higher energy prices according to the CEO of the world’s largest oil company
Let’s jump to CNBC from last Friday:
Asked by CNBC’s Dan Murphy about the current state of the oil market, Saudi Aramco CEO Amin Nasser said, “A persistent underinvestment in oil upstream and even downstream is still there. The latest report from the IEA talks about a demand of 101.7 million barrels — going from 100 million barrels in 2022 to almost 2 million barrels more with China opening up and the aviation industry,” which hasn’t yet returned to pre-Covid levels.“There is a lot of potential for growth in aviation,” Nasser said. “And with China opening up and the lack of investment, there is definitely a concern in the mid-to-long term in terms of making sure there is adequate supplies in the market.”
To unpack this, let’s begin with the basics…Oil and gas is a cyclical boom/bust industry.When times are good, elevated energy prices encourage new investments and infrastructure build-out. Eventually, the glut of new oil and gas in the market from these investments weighs on prices.Lower prices discourage new investments and infrastructure build-out. Eventually, this leads to shortages of supply, higher prices, and a new willingness to invest in infrastructure.Rinse and repeat.
Today, there’s a new wrinkle amplifying the under-development
We’re talking about the coordinated push from global governments to transition away from oil and gas, toward green energy.This has further discouraged new oil and gas investment and build-out in recent years.With that context, let’s jump to a 2022 study by Goldman Sachs:
We believe that the energy industry has been under-investing since the peak of 2014, with investments in traditional energy (oil, gas upstream) falling 61% from the peak and driving a 35% reduction in global primary energy investments, from US$1.3trn in 2014 to US$0.8trn in 2020.A number of oil and gas project investment decisions have been delayed since 2014, translating into 3/10 mboe/d of lost LNG/oil production in 2024-25, on our estimates.The focus has shifted in recent years to energy sustainability, but we note that the overall growth of the investments in renewables was not sufficient to compensate for the abrupt drop in investments in the traditional energy space, given the smaller scale and higher capital intensity per unit of energy output.
Goldman then dives into the additional market disruptor of the Russia/Ukraine war and its impact on global production.Put it all together, and here’s Goldman’s takeaway:
We have exhausted all of the spare capacity in the system, and now we are no longer able to cope with supply disruptions like the one we are currently witnessing because of the Russia-Ukraine conflict.
So, how will this impact oil pricing, and what does it mean for investors?
At the end of the day, oil mathematics are simple…What’s the cost to find, extract, and process the oil?What’s the revenue you’re getting from selling the oil?These questions point investors toward a “breakeven” price and the resulting impact on Big Oil’s profits.Back to Goldman:
Since 2017, the cost curve of oil has become smaller because there are fewer available resources and it’s become steeper because higher oil prices will be needed for production and to supply energy for a growing world population…At the current cost of capital, we need $90-per-barrel oil prices in order to get enough capacity on stream.A shrinking and steeping cost curve suggests upward pressure to long-term energy prices.
As I write, West Texas Intermediate crude (WTIC) trades at almost $80 a barrel. Brent crude is at $85.So, if Goldman is right and we’re headed to $90 just to get enough capacity online, that’s a price tailwind right there. But keep in mind, any unexpected influences on supply or demand (such as the Russia/Ukraine war) could push prices well into the $100s with ease.Now, that’s the revenue side. What about the cost side?Well, for context, last year, Exxon reported that its break-even cost is around $41 a barrel.There’s a lot of margin between $41 a barrel and Goldman’s estimate of $90 a barrel.
These economics are, in part, why legendary investor Louis Navellier has been urging investors to add top-tier oil and gas stocks to their portfolio for months
Here’s how Louis put it a few weeks ago in his Special Market Update podcast for his Platinum Growth Club subscribers. Keep in mind, when Louis made the following comments, WTIC traded at roughly $74 a barrel:
There seems to be a lot of anxiety over crude oil prices. And (earlier this week) they did drop.But the reality is that even at these prices, companies are cranking out record profits…I’m very comfortable and confident that energy stocks remain the best bet.Clearly, they have the best earnings…In my opinion, energy remains the oasis…
And remember, we’re moving into the spring/summer, which is a seasonally strong time of year.So, we have the longer-term tailwind of infrastructure shortages meeting the shorter-term tailwind of seasonal demand. Not a bad combo.For more of Louis’ research on the best oil and gas stocks in his Platinum Growth Club service, click here.
We’ll end with a bit of inflation trivia
Inflation has resulted in eyewatering prices for all sorts of consumer goods, but perhaps none more so than eggs.Here in California where I live, the retail price for a dozen large eggs has exploded from $2.35 a year ago to $7.37. Overall, the Bureau of Labor Statistics reports that egg prices have shot up 70%.Here’s a meme poking fun at the astonishing price run-up…
So, the question is “why?”Well, beyond supply chain snarls, there’s been an avian flu that wiped out 50.54 million birds in the U.S. last year.But it’s not just “fewer birds mean fewer eggs.” The cost of preventing even more bird flu deaths is substantial.From Brian Moscogiuri, global trade strategist at the egg producer Eggs Unlimited:
There’s tremendous costs associated with disinfecting and truck washes and trying to deter wild birds. It’s kind of just like this act of god situation that has been unavoidable and there’s really no silver bullet to stop it.
Add to this a second issue – the growing cost of chicken feed, which is attributable to the Russia/Ukraine war.Back to Moscogiuri:
Dating back to the start of the Ukraine-Russian war, we’ve seen very high input costs in terms of producing eggs related to grains. Corn and soy are the key ingredients in producing an egg, because that is the feedstuff that egg layers eat.
Now, the good news is the avian outbreak has eased. If you’ve been watching closely, you might have noticed that egg costs have fallen upwards of 50% in some parts of the nation in recent weeks.But before you get too excited, The Wall Street Journal reports “agency officials have said the virus will likely resurge in spring, when wild birds migrate across the U.S.”Perhaps we should forget the S&P and oil and put our money in chickens.Have a good evening,Jeff Remsburg
