3-7-23: Reviewing “Our Big Energy Bet” (As Spring Approaches)

by Louis Navellier

March 7, 2023

After wild winter weather enveloped much of America, boosting natural gas prices, we now approach spring, when crude oil prices typically rise, so I remain convinced that our “Big Energy Bet” will continue to pay off in the upcoming months. Due to America’s record natural gas production as well as steadily rising crude oil production, the U.S. is reasserting its energy clout and is helping the world break away from Russian crude oil. The U.S. exported 1.53 million barrels of crude oil a day in January, with no releases from the Strategic Petroleum Reserve (SPR). Interestingly, the Energy Department has received approval to release another 26 million barrels from the SPR, but it may be holding back until the prices at the pump annoy consumers enough to cause political problems for the Biden Administration.

Crude oil inventories in the U.S. are currently 9.7% higher than the 5-year average, so West Texas Intermediate (WTI) prices will likely remain relatively stable until this excess inventory is depleted. However, Europe and much of the rest of the world runs on Brent light sweet crude oil, where prices remain significantly higher than those for WTI crude. The investment angle in this price gap is that the wider the spread between WTI and Brent, the more money our refiners tend to make.

Global crude oil prices rose late last week in the wake of positive economic news as well as new reports that Russia’s crude oil shipments to India were being disrupted by insurance complications from Western sanctions. Russia’s war with Ukraine remains the big international wild card. The newest development is that China is suddenly calling for a cease-fire with peace talks between Russia and Ukraine. Specifically, China’s Foreign Ministry outlined a 12-point plan it called “China’s Position on the Political Settlement of the Ukraine Crisis.” China remains very critical of Western sanctions, which have recently expanded to include Chinese companies that do business with Russia. To protect its economic interests, China has emerged as a peace broker and President Xi is planning to meet with Ukrainian President Zelensky.

China has accused the U.S. of prolonging the Ukrainian conflict with an eye toward profiting from energy prices and by letting some arms shipments to Ukraine flow into neighboring third world countries. Jin Canrong, a professor at Renmin University of China in Beijing, said, “American military enterprises have made a lot of money from the war in Ukraine.” Now that Vice President Harris has accused Russia of both war crimes and crimes against humanity, the Biden Administration has signaled that it does not intend to negotiate with Russia, so China has ironically emerged as the only global “peace broker.”

As expected, Russia’s Kremlin spokesman, Dmitry Peskov, threw cold water on China’s proposed peace plan, saying, “We don’t see any of the conditions that are needed to bring this whole story towards peace.”

If Russia launches its anticipated spring offensive, that could have long-lasting consequences on Russia and oil prices. Russian crude oil output is now down 1.5 million barrels per day and is expected to steadily decline as crude oil backs up in pipelines and forces Russia to cap its wellheads. Restarting any capped wellheads in the Arctic is problematic, so it will be difficult for Russia to revive its oil production.

As a result, the spring surge in crude oil prices is virtually guaranteed unless China can miraculously get Russia to come to peace talks or postpone its spring offensive. Worldwide crude oil demand is now at a record level and will rise steadily in the upcoming months as the Northern Hemisphere warms and seasonal demand picks up. Other than a nuclear war or other shocking event that stops world commerce, I remain confident that crude oil prices will rise steadily in the upcoming months as demand picks up.

U.S. Growth is Anemic but Positive

With the first quarter ending last week, the Atlanta Fed now estimates that first-quarter GDP growth reached a 2.3% annual pace. There will be a new estimate coming out this morning, Tuesday, March 7.

Last week’s other economic news began negative, but with a silver lining. On Monday, the Commerce Department announced that durable goods orders plunged 4.5% in January, but that was due largely to a 13.3% decline in transportation orders attributable to Boeing’s 54.6% drop in commercial aircraft orders. Excluding transportation, durable goods orders declined just 0.7% in January, and the “green shoot” in the durable goods report was that core capital goods shipments, indicative of business investment, surged 1.1%. If core capital goods continue to improve, there is hope for a manufacturing sector recovery.

Speaking of manufacturing, ISM announced on Wednesday that its manufacturing index rose to 47.7 in February, up from 47.4 in January. Since any reading below 50 signals a contraction, the manufacturing sector is still in a recession, for the fourth straight month. The “new orders” component rose to 47 in February (up from 42.5 in January), while the production component declined to 47.2 (down from 48 in January). Order backlogs rose to 45.1 in February (up from 43.4 in January), but since all of these major components remain below 50, the U.S. manufacturing sector is still sputtering and in a contraction.

In contrast to this downbeat report, China’s manufacturing sector has rebounded impressively. China’s National Bureau of Statistics announced on Tuesday that its purchasing managers index (PMI) rose to 52.6 in January, up from 50.1 in December. Economists were expecting the Chinese PMI to rise to 50.5 in January, so this was a big surprise.  I should add that private economists are expecting 5.5% annual GDP growth for China in 2023, which is below the 6% GDP goal of the Chinese government, but still robust.

U.S. growth is concentrated in the service sector. ISM reported on Friday that its non-manufacturing (service) index remained at 55.1 in February, about level with its 55.2 reading in January. Since any reading above 50 signals an expansion, the service economy is still very healthy. The ISM service index has now expanded for 32 of the past 33 months, and fully 13 of the 17 industries surveyed reported an expansion. The new orders component expanded to a robust 62.6 in February from 60.4 in January. Also encouraging is that service PMIs are now largely above 50 in Europe, so a broad-based economic recovery is apparently underway, despite the fact that some manufacturing surveys are still contracting.

In the labor market, the Labor Department announced that weekly unemployment claims declined to 190,000 in the latest week, down from 192,000 in the previous week. Continuing unemployment claims declined to 1.655 million in the latest week compared to a revised 1.660 million in the previous week.

Turning to real estate, the National Association of Realtors announced last Monday that pending home sales surged 8.1% in January, which was a big surprise, since economists only expected a 1% increase. Falling mortgage rates in December apparently stimulated home sales, since pending home sales increased in every region. However, now that bond yields have headed higher in the wake of the latest inflation fears, mortgage rates have headed significantly higher, and that may stall recent home sales.

The Wall Street Journal reported on Tuesday that apartment rents fell in every major metropolitan area through January as the largest inventory of new apartments in nearly four decades became available. January median rents were 3.5% lower than the equivalent rents paid in August. The share of apartment dwellers that renewed leases declined in January to only 52%, the lowest level for January since 2018. Suddenly, many apartment dwellers have more choices due to new inventory hitting the rental market.

If these median rental costs finally start to decline, it will provide major inflation relief in a key category.

The owners’ equivalent rent component in the CPI has been stubbornly high in recent months, so if it “cracks” and starts to decelerate in the upcoming months, inflation should decelerate. I remain on the outlook for “green shoots” that will signal lower inflation, but right now falling apartment rental costs, plus lower median home prices are the most promising indicators that inflation may be cooling off!

The S&P CoreLogic Case-Shiller National Home Price Index was updated on Tuesday and revealed that home prices declined 0.8% in December, but they rose 5.8% in the past 12 months. This represented the sixth straight drop in monthly home prices after home prices peaked in June 2022. Home prices in Phoenix declined 1.9% in December, in a city which was once the hottest housing market in the U.S.

Currently, Miami and Tampa are the hottest housing markets in the country with 15.9% and 13.9% home price appreciation, respectively, in the past 12 months, due to the national exodus to Florida. The weakest housing market is San Francisco, where home prices have fallen 4.2% in the past 12 months. As home prices moderate, hopefully that will show up in owners’ equivalent rent in the Consumer Price Index.

Some Investment Implications of the Current Economic Outlook

Despite some new “green shoots” that are indicative of positive economic growth, we remain in a 15% market, where only the top 15% of stocks are leading the overall market. The FAANG stocks have stumbled, so, in my opinion Nvidia is now the new stock market leader, due to its AI expertise. Specifically, Nvidia is helping Mercedes to emerge as the autonomous driving leader due to its Level 3 system via Nvidia chips. The Mercedes system also uses Lidar, so companies that make Lidar sensors have also firmed up.

Tesla abandoned expensive Lidar systems in favor of cameras only, but right now Mercedes and Nvidia are leading the race to develop the safest autonomous driving system. Other auto manufacturers are also using Nvidia’s AI chips and systems, so its automotive business remains very promising.

Speaking of semiconductor chips, the $39 billion Chips Act passed by Congress last year, prohibits U.S. companies from expanding in China for a decade. Commerce Secretary Gina Raimondo said, “Recipients will be required to enter into an agreement restricting their ability to expand semiconductor manufacturing capacity in foreign countries of concern for a period of 10 year after taking the money.”

Raimondo added that companies receiving U.S. government funding must also not “knowingly engage in any joint research or technology licensing effort with a foreign entity of concern that involves sensitive technologies or products.” In conclusion, Raimondo said, “Our goal is to make sure that the United States … is the only country in the world where every company capable of producing leading-edge chips will be doing that in the United States at scale.” In addition to the $39 billion in the Chips Act, another $75 billion in federal funding could be available to the U.S. semiconductor industry, according to Raimondo.

Elon Musk hosted a “Tesla Investor Day” on Wednesday and laid out a mission statement called “Master Plan, Part 3” to become the largest car manufacturer in the world with an output of 20 million vehicles a year by 2030, up from 1.3 million now. Tesla would have to spend up to $175 billion to achieve its 2030 production goal, and that spooked some investors. No matter how ambitious Musk may be, the media and investors seem more interested in when the Cybertruck will be launched, since some prototypes are being spotted around Tesla’s Palo Alto headquarters and, outside of Cybertruck, Tesla’s model lineup is getting stale and investors crave exciting new models. Meanwhile, electric vehicle (EV) makers are fighting high lithium, nickel, and cobalt prices and Tesla needs to seriously address this acute shortage, since even though Tesla is investing in lithium mining, the high price of batteries is constraining EV sales globally.

Speaking of EVs, Ford will resume production of its F-150 Lightning on March 13^th. The culprit behind the production shutdown is apparently attributable to SK On, which is building lithium-ion battery packs for Ford. Specifically, a Ford spokesman said that it will “apply all our learnings and work with SK On’s team to ensure we continue delivering high-quality battery packs…down to the battery cells.”

In the meantime, the recently made F-150 Lightning vehicles remain in limbo, pending updates to “parts and engineering processes.”  What stopped the F-150 Lightning production was that one vehicle awaiting a pre-delivery inspection in a holding lot caught on fire while charging. Ford and VW Group are pushing fast AC/DC charging and their battery packs typically weigh more due to extra cooling to dissipate the heat that fast charging can generate; so, the source of the problem remains elusive, whether it lies with the electronics, or with the cooling associated with the SK On battery packs for the F-150 Lightning.

Finally, I must sadly report that Rivian fell sharply last Wednesday. It was an ESG darling when it went public, since it was briefly worth more than Ford. Rivian announced on Tuesday that it lost $1.72 billion in the fourth quarter, down from a $2.42 billion loss in the same quarter a year ago. The company depleted $2.2 billion in cash in the fourth quarter and had $11.6 billion in cash at the end of the quarter.

At this “burn rate,” Rivian may be on the verge of bankruptcy later this year. The biggest problem facing Rivian is that one of its former investors, namely Ford, is selling its F-150 Lighting significantly cheaper than Rivian’s R1T pickup. Furthermore, the Tesla Cybertruck is coming, and it will also be cheaper than Rivian’s R1T pickup, so I do not foresee any scenario where Rivian can survive. It looks like Rivian is another ESG disaster, and its IPO underwriters – Goldman Sachs, J.P. Morgan, and Morgan Stanley – should be ashamed of themselves for pushing this “pump and dump” IPO to naïve ESG investors!

Navellier & Associates  owns Nvidia  Corp (NVDA) in managed accounts, a few accounts own Tesla (TSLA), per client request in managed accounts. We do not own, Ford Motors (F), Boeing Co (BA), or Rivian Automotive (RIVN). Louis Navellier and his family own Nvidia Corp (NVDA), via a Navellier managed account. He does not own Tesla (TSLA), Boeing Co (BA), Ford Motors (F), or Rivian Automotive (RIVN) personally.