by Louis Navellier
December 12, 2023
As we near the end of the year, there are still some wildcards out there. A U.S. Navy destroyer (the USS Carney) and three commercial ships (including a cargo ship) operating in the Red Sea were attacked by drones and ballistic missiles. Iran-backed Houthi forces in Yemen claimed responsibility for these attacks.
Since Israel began its offensive to eliminate Hamas, there have been over 75 drone and missile attacks on U.S. troops and facilities. Although the USS Carney has been very effective at shooting down drones and missiles, the escalation of these attacks by Iranian proxies is concerning and may impact crude oil prices.
The conflict between Russia and Ukraine has now entered a defensive stage. Just like the multiple Russian defensive obstacles largely stopped Ukrainian counter-offensive attempts in recent months, Ukraine is now falling back and installing its own defensive obstacles as support for Ukraine in the West is waning, especially as allies like Germany and the U.S. are in the midst of contentious budget battles.
Also, Ukraine apparently attacked the Trans-Siberian Railway in two locations deep in Eastern Russia, in attacks designed to hinder trade between Russia and China. Ukraine has not taken responsibility for the attacks, which raises the question about whether Russia’s crude oil pipeline in the Arctic Circle will also be attacked. After destroying Russia’s two natural gas pipelines, it is only a matter of time before the rest of Russia’s energy infrastructure is attacked. Hopefully, this threat will get Russia to agree to a cease fire.
Speaking of global hot spots, Venezuela recently asked its citizens to vote to take over approximately two thirds (160,000 square kilometers, or 62,000 square miles) of Guyana, which has become the hottest new crude oil producer in Latin America. Naturally, about 95% of the 10.5 million voters in Venezuela have approved this land grab. Venezuela argues that the Essequibo River is the natural border between the two nations, as declared in 1777 under Spanish rule, and that Britain wrongly appropriated Venezuelan lands. Guyana asserts the border which was set in the British colonial era, and was confirmed in 1899 by arbitration in the International Court of Justice, validates its long-honored (124-year) border with Venezuela.
Obviously, military intervention from outside forces may ensue if Venezuela tries to seize a big chunk of Guyana. Venezuela is backed by Russia, while Guyana is backed by many big U.S. energy companies, like Exxon Mobil. I suspect that private military contractors will initially defend Guyana, but the U.S. Navy and Marines may get involved. In the meantime, the U.S. Air Force conducted military flights last Thursday. Specifically, the American embassy in Guyana said, “In collaboration with the Guyana Defense Force, the U.S. Southern Command will conduct flight operations within Guyana on December 7.”
Naturally, any conflict there could cause crude oil prices to rise, especially when you add the new tensions in oil-rich Venezuela and Guyana to ongoing tensions in oil-rich Russia and the Middle East.
Speaking of energy prices, due to this year’s El Nino weather pattern, Europe may turn into a popsicle this winter, as a wave of global cooling has arrived. For example, Munich just experienced Germany’s largest December blizzard ever, after 44 centimeters (17+ inches) of snow fell and shut down air travel. Northern German cities, like Berlin, could receive even more snow. Extreme cold is expected to persist in Northern Scotland, Scandinavia and much of Northern Europe. Interestingly, one of my associates in Britain reported that they are actually being invaded by owls fleeing abnormally cold weather in Russia!
This brings up another interesting dilemma. Severe storms in the Black Sea recently disrupted trade of up to two million barrels per day of crude oil from Kazakhstan and Russia, according to the Caspian Pipeline Consortium. These Black Sea disruptions have persisted for three straight weeks now, and Russian crude oil shipments are now at a three-month low. I should add that Russia’s refinery output recently collapsed in several refineries due to crude oil shipping disruptions. Furthermore, since most of Russia’s crude oil production is above the Arctic Circle and was developed with the help of Western energy companies, Russian pipelines could now freeze over, which would render them worthless, permanently disrupting Russia’s crude oil output. As a result, crude oil prices could rise if these production disruptions persist.
Worldwide energy demand typically rises in the spring as the Northern Hemisphere thaws. Aided by record U.S. and Latin American crude oil production, worldwide energy demand continues to steadily rise. The green transition has temporally stalled, due largely to high interest rates, since most major green projects are financed upfront. COP28 ended with many big energy companies pledging to reduce methane emissions. The real outcome of COP28 is that the major crude oil and natural gas producers intend to control carbon capture, green hydrogen production and alternative energy generation. So essentially, the pace of the green transition will be controlled by the major energy producers.
Interestingly, Sultan Al Jaber, an Emirates oil executive who is leading the COP28 conference, said there is “no science” behind the idea that fossil fuels must be phased out in order to keep average global temperatures from rising above 1.5 degrees Celsius. The outrage this comment caused in the green crowd is still simmering. For instance, John Kerry was venting at Chevron for not joining the pledge to reduce methane emissions, and Al Gore has also been very critical of the fossil fuel industry for hijacking the green agenda. The bottom line is that green energy is very expensive, and the fossil fuel industry will make just enough green energy to appease regulators, but fossil fuels will persist for many decades.
China’s crude oil imports declined 10.4% to 10.33 million barrels per day in November, down from 11.53 million barrels per day in October. Compared to a year ago, China’s crude oil imports declined 9.3%. So, if China is using less crude oil, its economic activity is obviously declining. Also, Moody’s downgraded China’s sovereign credit rating to “negative” last Tuesday, citing persistently low economic growth, rising debt and an overhang from the property crisis. There are also rising debt defaults in China from excessive property speculation. Oddly, Moody’s still expects 4% annual GDP growth in China in 2024 and 2025.
The Service Economy and Job Creation Remain Relatively Strong
Last Tuesday, the Institute of Supply Management (ISM) announced that its non-manufacturing (service) index rose to 52.7 in November, up from 51.8 in October. This is the 11th straight month that the ISM service index has been in positive territory – since any reading above 50 signals an expansion.
ISM’s business activity component rose to 55.1 in November, up from 54.1 in October, another good sign. The inventory sentiment component surged to 62.2, up from 54.4 in October, representing the strongest component improvement, and 15 of the 18 service industries that ISM surveyed reported growth!
Despite this strength, the manufacturing sector is still in recession, and the Atlanta Fed lowered its fourth-quarter GDP estimate to a 1.2% annual growth rate, which is in-line with many private economists.
Turning to the widely followed jobs situation, ADP announced on Wednesday that 103,000 private-sector payroll jobs were created in November, which was about 20% below the economists’ consensus estimate of 130,000, but the Labor Department on Friday announced that almost twice as many (199,000) payroll jobs were created in November, boosted by the end of the UAW strikes, which added 30,000 jobs.
The unemployment rate declined to 3.7% in November, down from 3.9% in October. The average work week rose slightly, to 34.4 hours. Labor force participation remained unchanged at 62.8%. In the wake of the UAW pay increases, average hourly earnings rose by 0.4% (12 cents) to $34.10 per hour, and wages have now risen 4% in the past 12 months. Overall, this payroll report was stronger than expected and should not change Fed policy. However, Treasury bond yields rose in the wake of this payroll report.
Overseas, China is losing its mojo, on two fronts. Although their exports rose 0.5% in November, a big improvement versus October’s 6.4% decline, China’s imports declined 0.6% in November after improving 3% in October. Weak domestic demand continues to hinder imports. China’s economy is still sputtering.
More damaging, long-term, Italian Foreign Minister Antonio Tajani announced on Wednesday that Italy will be exiting its “Belt and Road Initiative” with China, since the pact “has not produced the desired effects” and is no longer “a priority.” In a dig at China, Tajani said countries that have not joined China “have had better results.” Italy is now shifting to the right under Prime Minister Giorgia Meloni, who continues to assert Italian values and is striving to boost Italy’s identity – despite this being contrary to what the EU in Brussels wants to see. Prime Minister Meloni loves to needle France, the EU in Brussels, and even Germany during their current budget woes, so (naturally) she remains very popular in Italy!
Navellier & Associates owns Exxon Mobile (XOM) in managed accounts. We do not own Chevron (CHV). Louis Navellier and his family own Exxon Mobile (XOM), via a Navellier managed. He does not personally own Chevron (CHV).