by Louis Navellier
February 22, 2023
We’re coming up to the one-year anniversary of Russia’s invasion of Ukraine this week (on February 24). The sanctions against Russian oil, although well-intended, can sometimes backfire, as sanctions often do. Essentially, Western nations that impose sanctions on Russia also allow Russian oil to be transferred at sea to insured vessels, so a shadow fleet of tankers has been assembled by Russia to do these transfers at sea to keep selling its heavy sour crude, despite a $60 price cap and strict financial sanctions.
If Russia dares to stage a second, stronger invasion of Ukraine this spring, who knows if the West will become more serious about enforcing these sanctions more consistently among these third-party nations.
As Europe strives to end its reliance on Russian crude oil, the future does not look good for Russia. Essentially, Russia does not have storage facilities – like a Cushing Oklahoma-type facility or a Strategic Petroleum Reserve (SPR) – to store its crude oil. As a result, as its export markets collapse, Russian oil starts to back up in pipelines, effectively forcing many Russian wellheads to be shut. Even worse, if crude oil stops moving through Russia’s Arctic pipelines, the contents in the pipeline can freeze and create huge damage, which means that if the wellheads are capped, then the pipelines may suffer irreparable damage.
To put this in perspective, Exxon-Mobil helped Russia’s Rosneft develop their massive Kara Sea discovery in the Arctic Ocean over a decade ago. Rosneft also undertook successful Arctic explorations with Italy’s Eni and Norway’s Equinor, but Exxon-Mobil’s cooperation with Rosneft ended after Russia invaded Crimea in 2014. Equinor transferred its assets to Rosneft in 2022 and Eni halted buying natural gas from Gazprom in late 2022. As these and other Western countries stop buying Russian crude oil and natural gas, Russia is becoming increasingly isolated. Furthermore, Western technical expertise to operate wellheads and pipelines in extreme Arctic conditions has vanished, which means that Russia is going to continue having a hard time maintaining its energy facilities, especially due to equipment sanctions.
Already Russia’s crude oil production has been reduced by about 1.5 million barrels a day vs. a year ago. Due to wellheads and pipeline complications in the Arctic, another 3-5 million barrels a day of Russian crude could disappear in the upcoming months. Russia is the world’s second largest crude oil producer after North America (Canada and the U.S.). For OPEC, Brazil, and other countries to make up for Russia’s lost crude oil production is problematic, so my prediction that crude oil will rise to $100 per barrel in the spring is now unfolding and $120 per barrel for Brent light sweet crude during the summer peak is likely.
In addition, Belarus and Russia account for 41% of global potash fertilizer production, but sanctions are now restricting exports. Furthermore, Russia accounts for about 15% of global nitrogenous fertilizer exports, which make products like ammonia and urea. So essentially, global food production is now at risk due to sanctions against Belarus and Russia. As a result, food prices may remain high in the upcoming months.
Sadly, the Biden Administration is still playing politics with our Strategic Petroleum Reserve (SPR). Last Wednesday, The Wall Street Journal reported that U.S. crude oil exports hit a record 5.1 million barrels per day in the week ending on October 21, 2022, but that was boosted by continuing releases from the SPR. In addition, open interest for West Texas Intermediate (WTI) contracts are now at a record high due to U.S. exports and high tanker traffic in the Gulf of Mexico. WTI crude is cheaper than the Brent sweet crude, but more refineries around the world are increasingly set up to refine WTI crude. The bottom line, according to the Journal, is that U.S. crude oil exports are increasingly influencing global crude oil prices.
Partly due to these political moves, the Energy Information Agency (EIA) reported on Wednesday that U.S. crude oil inventories rose by 16.3 million barrels in the latest week, which is the eighth week in a row that crude oil inventories have risen. I should add that crude oil inventories are now 8% higher than they have been historically this time of year. Also, the EIA said the U.S. will soon sell another 26 million barrels from the SPR, but since Congress has overwhelmingly voted to ban sales to China, I am not sure it is wise for any additional SPR releases while inventories remain so high. Maybe Congress can intervene.
Inflation and Retail Sales Dominated Last Week’s News
Last week was a big one for economic news. First, on Tuesday, the Labor Department announced that the Consumer Price Index (CPI) rose 0.5% in January and 6.4% in the past 12 months. The biggest news was that “Owners’ Equivalent Rent” rose an unexpectedly high 0.7% in January and 7.9% in the past year, and the overall housing and shelter category accounted for about half of the January CPI increase.
Economists were expecting the overall and core CPI to rise by just 0.4% and 0.3%, respectively, so this was a big disappointment. Although the 12-month rate has declined for seven straight months, the details were disappointing, so the Fed will continue to raise key interest rates in an attempt to squelch inflation.
On Thursday, the Labor Department reported that the Producer Price Index (PPI) rose 0.7% in January and 6% in the past 12 months. The core PPI, excluding food, energy, and trade margins, rose 0.6% in January and 4.5% in the past 12 months. The core index is up sharply from a 0.2% increase in December.
In between those two inflation reports, the Commerce Department on Wednesday shocked everyone by declaring that retail sales surged 3% in January, substantially above economists’ consensus estimate of a 1.9% gain. An 8.7% increase in Social Security checks to 70 million recipients likely helped boost consumer spending as well as positive seasonal adjustments. Spending at bars and restaurants soared 7.2%, likely aided by milder winter weather. Auto sales soared 5.9% and furniture store sales rose 4.4%. Sales at electronics and appliance stores rose 3.5%. Every major retail sales category reported sales gains.
In the wake of this stunning January retail sales report, most economists will be revising their first-quarter GDP estimates higher. (Currently, the Atlanta Fed is estimating 2.5% annual first-quarter GDP growth.)
And finally, the Labor Department on Thursday reported that weekly jobless claims declined in the latest week to 194,000 vs. a revised 195,000 the previous week. Continuing unemployment claims increased to 1.696 million in the latest week vs. 1.680 million the previous week, so the job market remains healthy.
Navellier & Associates owns Exxon Mobil Corp. (XOM) in managed account. Louis Navellier and his family own Exxon Mobil Corp. (XOM) via a Navellier managed account.