TL;DR: Keys to Understanding the European Energy Crisis and Price of Oil via /r/wallstreetbets #stocks #wallstreetbets #investing


TL;DR: Keys to Understanding the European Energy Crisis and Price of Oil

WTF is Happening to Oil?

The price of oil is both a cause and an effect of the crazy market conditions we're facing in 2022. Who could have picked a more contentious issue, energy security, as the top global foreign policy concern this time a couple years ago would have laughed.

On April 20th 2020, I was definitely blazing (weed is tight 📷 ). That was also the day that you could have been paid money to buy a barrel of oil from someone. How far things have come in such a short time. I find it interesting that our market cycles are seemingly getting shorter and more violent as of late (maybe indicating the end of a longer term debt cycle? more retail investors flipping options?) than previous recessions and economic downturns

On the one hand, we're seeing astronomical costs for natural gas prices as Europe scrambles to secure replacement supplies after Russia cuts off the Nord Stream 1 pipeline entirely.

I even saw this UK game show offering to pay people's utility bills for 4 months as a prize https://www.businessinsider.com/uk-tv-wheel-of-fortune-prize-energy-bills-prize-crisis-2022-9 (not sure if this was satire or not)

But on the other hand we have the backdrop of a global recession becoming ever more likely by the day, with many economic indicators signaling that central banks will not be messing around with inflation regardless of what effects their QT policies will have on growth (edited)

Market Factors to Watch

Europe is a Mess

Europe is currently a fucking mess. Seriously, if you haven't been following it, go check it out. Factories and businesses have to shut down completely during rolling blackout periods; that's real businesses having to cut into their bottom lines because they have to turn away customers or miss other opportunities. Europe is understandably worried about this situation. They know that asking their citizens to pay these insane costs is unsustainable.

In some cases, utility bills are more than 20% of people's entire yearly take-home income. There are various takes about the efficacy of different avenues proposed to navigate out of this mess. One of these methods is to pay the energy companies directly, or pay indirectly by giving financial stimulus to their citizens

European energy is becoming a ponzi scheme? https://oilprice.com/Energy/Energy-General/Europes-Reaction-To-The-Energy-Crisis-Is-Turning-Into-A-Ponzi-Scheme.html

Shutdowns, rationing, and blackouts: https://www.nytimes.com/2022/09/05/business/russia-gas-europe-france.html

Germany scrambling to re-work reserves: https://www.bloomberg.com/news/articles/2022-09-05/russian-gas-cut-off-scuppers-german-plan-to-bolster-reserves

Russian Oil Price Cap

One such proposal that sounds better the more I've considered it is a price cap on Russian oil. The thinking is, Russia is still selling its oil on the global markets despite attempts to shame the world into embargoing them. Albeit for cheaper prices, but they're still able to make a profit and fund their war in Ukraine.

Setting a price cap would "prevent" countries from paying more than a certain price, much lower than they are currently getting, when purchasing from Russia. The price cap would work because enough countries would sign onto the agreement where Russia would have no choice but to accept the terms of lower priced sales from those countries.

Then other countries that are not participants would have better negotiating power for lower prices themselves. By squeezing Pooty's margins, it slows their war efforts and lowers the global price of oil in the process.

How the Oil Cap Works: https://foreignpolicy.com/2022/09/06/russia-oil-price-cap-putin-war-sanctions-energy-g7-europe-crisis/

OPEC Profiteering

Whether it's government subsidies or Putin Price Caps, or just simply the likelihood of a recession causing significant demand destruction (remember, markets try to be forward looking), there are many reasons for the price of oil to end its massive rally that started that Weed Day, 2020 (see the chart below).

But not to worry, OPEC is on the case! As you can imagine, OPEC has enjoyed a profit windfall resulting from recent market conditions. They knew that the world got too cocky with their promises of a Green Energy Revolution, and their bets have paid off. "Cute windmills" OPEC said (not bashing the green movement at all whatsoever, but my true belief is that Russia caught the world with its pants down on this energy thing in the short term, and OPEC has been a huge beneficiary)

So now OPEC wants to keep the party going, of course. Just this week, they reversed course on plans to keep production at current levels, deciding instead to cut production by 100,000 barrels per day as they see the price of oil starting to fall.

Looming OPEC cuts: https://oilprice.com/Energy/Crude-Oil/Further-OPEC-Production-Cuts-Could-Be-Looming.html

What's Next?

All in all, energy prices will be key for whatever is to come for 2HFY22. Oil stocks have been some of the strongest this year, so if those start to tank then there won't be much holding SPX above these key levels.

Curbing Energy Prices: https://oilprice.com/Latest-Energy-News/World-News/EU-Energy-Council-To-Debate-Two-Options-To-Curb-Energy-Prices.html

60% of European manufacturers could close: https://oilprice.com/Energy/Energy-General/60-Of-UK-Manufacturers-Could-Close-As-Energy-Prices-Soar.html

Have a good day,

-Pickle

Submitted September 08, 2022 at 02:26PM by The_Yeet_Squad
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