Bond yields are back up, crude prices are surging…wheat limit up again. Commodity prices as measured by the S&P GSCI index are at their highest since 2008. This is stagflation territory but the market thinks the Fed won’t remove liquidity that swiftly; seems wishful thinking. US stock markets bounced, with the Nasdaq +1.62% and S&P 500 +1.86% in a broad-based rally. European stocks nursed more modest gains in early trade before turning weaker – hard to see how Brent @ $120 can engender much confidence in Europe right now but the urge to buy dips…the VanEck Russia ETF (-73% YTD and still trading despite Moscow being closed) drew huge meme-stock like volumes yesterday – temptation to BTFD is just too strong. Are markets even close to pricing in total collapse of world’s 12th largest economy? Clearly not when you consider the leverage in the system (rug pull) and impact on energy in particular…question is whether it does collapse – can the jaw-jaw triumph before we get too much war-war? 

One-way traffic for oil as traders look beyond Russia for barrels…Brent close to $120. Spreads between the front and back months are very wide, the backwardation pointing to extreme tightness in the market. Buyers’ strike, self-sanctioning…OPEC stuck to its guns with a 400k bpd increase…truth is they cannot even hit the current quotas (compliance last month was at 136%) and now we must contend with unwanted Russian oil and the potential for stranded stocks as traders and buyers look elsewhere. Ships in Black Sea – crude oil tankers cancelling loadings at Novorossiysk. Also saw on the wires that Surgutneftegas had failed again to sell Urals crude via its regular tender. No buyers even with massive discounts. I talked this week about how higher civilian casualties would pressure the West into banning Russian oil and gas exports; they may not need to. Self-sanctions are already playing a big role…Shell, BP ,Chevron all exiting but traders and customers are swerving Russian oil without any sanctions needed…Trafigura is freezing investments in Russia. SEB bank estimates that 70% of the 4-5m barrels of daily Russian exports is already in effective embargo; i.e. they can’t find buyers for their crude in the majority of sales. This is very important and would be considered a significant strategic win for the West, even if it does not feel that way for consumers.  

The Oxford Institute for Energy Studies says self-sanctioning is already having an impact on oil supplies. “At its peak impact, such a scenario could result in a disruption between 3 mb/d to 4 mb/d of Russian crude oil production from current levels of 11 mb/d (including condensate),” they write in a paper – well worth a look. 

How to fix it? US oil demand at 21m bpd, production about 8% below 2019 at a little under 12m bpd – are we getting to demand destruction levels yet, or does Biden give the green light to drill, baby, drill? I noted on Monday that the White House needs to give a green light for more production. Well maybe they just did: “Prices are quite high, the price signal is strong. If folks want to produce more, they can and they should,” White House National Economic Council Deputy Director Bharat Ramamurti said in an interview yesterday. It’s not exactly a call to drill from Biden himself, but the Democrats must contend with the green lobby and hard left. The proof will be in the output statistics. Moreover, can they drill more? Shortages of people and equipment make it hard. If President Biden were President Trump, the White House would right now be doing all it could to get US shale ramping and pressuring the Saudis to do a lot more. Maybe Biden has already given up on the mid-terms, or he just doesn’t really get it? 

Meanwhile, we are still seeing some epic intraday moves in gas markets in Europe even as Gazprom increases flows to Europe. European gas prices hit a record this morning. Coal prices are through the roof too…nowhere to hide for European consumers about to get hit by a mega electricity bill and soaring inflation.

How high can oil go? The front month action is anyone’s guess…fear driven. Further out, amid very steep backwardation, there is less worry about a structural deficit. Amrita Sen of Energy Aspects says oil prices could surge towards $170-$180 before seeing demand destruction. So, we need a major demand shock or some of the biggest non-Russian players need to pull some serious levers. Stocks remain low and supply tight: EIA inventories for the week ending Feb 25th showed crude draw of 2.597m Cushing: -0.972m Gasoline: -0.468m Distillates: -0.573m. 

Fed chair Powell: huge uncertainty, still wants to raise rates in March, but only by 25bps, sticks to view that inflation will ease later in the year…doesn’t seem to be pricing in a war. Prepared to go to 50bps at some point maybe, but on the whole this was a reassuring performance by Powell – he wants to start tightening without unnerving the market given the war. Many in the market will think Powell is wrong – a 25bps hike when inflation will hit 8% this month is absurd in many ways. But don’t let that get in the way: don’t fight the Fed and don’t fight the tape.  

In FX, EURUSD is off its lows but retains a 1.10 handle; market is fearful for Euro area growth and ECB response. EURGBP back to the multi-year lows. The dollar index couldn’t break the 97.80 area and is back to 97.50 this morning. Cable well off yesterday’s lows. The Bank of Canada raised rates 25bps to 0.5%, signals it will need to rise further. USDCAD fell as the loonie found bid. 

Companies

On the FTSE today miners are advancing coz commodity prices, airlines and travel getting hit again.

LSE Group shares surged as it reported headline pre-tax profits rose 26% to £2.3bn in 2021 … Refinitiv working.

ITV shares plunged despite record advertising growth. Adjusted EBITDA was up 42% to £813m, whilst margins improved by 3 percentage points to 24%. Shares dipped 15%…maybe on plans for a new streaming service that it hopes will double digital revenues to £750m. Investors might worry about the investment required to make this work.

Melrose declined 8% even as it said results for last year were ahead of expectations. Nevertheless it was another annual loss and revenues declined as chip shortages bit.

Taylor Wimpey up a touch, continues the good news from housebuilders – how can it be anything but? Revenues up more than 50%, pre-tax profits surged 157% to £680m.

Rentokil -5% despite core business organic growth at +7.5% and +19.5% growth in ongoing operating profit.

In the US, Snowflake tumbled 22% in pre-mkt trading after its forecasts came up short and it reported the slowest revenue growth since 2019 in the fourth quarter.