OIL : RISK PREMIUMS OFF

Big oil, big purchases

Chevron (NYSE:CVX) has unveiled plans to acquire Hess (NYSE:HES) for a staggering $53 billion, with the total amount including debt reaching $60 billion. Earlier, Exxon Mobil (NYSE:XOM) also announced its intention to purchase Pioneer Natural Resources (NYSE:PXD) for an approximate $60 billion. These significant acquisitions highlight the substantial cash reserves held by Big Oil companies.

 

They present shareholders with two promising options: substantial share buybacks and generous dividend payouts, or substantial mergers. Both choices bode well for investors. These acquisitions underscore the confidence of traditional energy companies in the industry, and their preference for expanding their core fossil fuel activities, rather than shifting toward alternative energy sources.


Big oil unfazed

For now, the good fortune of these companies remains largely unaffected by climate change. Big oil corporations have been stepping back from their climate goals, focusing their investments on what continues to be lucrative: fossil fuels. Furthermore, the recent upswing in oil prices further favors their approach.


Israel Hamas conflict and oil

During this week, the price of WTI dropped to $80 per barrel, partly due to relatively limited escalations in Gaza. Nevertheless, the risk of a sudden spike in oil prices lingers, and if it does occur, Saudi Arabia is likely to come to the aid of oil enthusiasts near the $80 per barrel threshold.

 

Many on Wall Street believe that crude oil prices should be higher, driven by the proximity of the Gaza situation to major oil-producing nations, including Saudi Arabia, the United Arab Emirates, Iraq, and Kuwait. The Strait of Hormuz, located between Israel and Palestine, is a crucial bottleneck for global oil transportation, with one-fifth of all oil passing through these waters.


US policy impact on oil

The United States produces sufficient oil to meet its domestic energy requirements. However, the ability to mitigate any shocks in fuel prices is critical for the world’s largest economy, especially in times of heightened tensions in the Middle East. Notably, U.S. crude, gasoline, and distillate stockpiles all experienced significant reductions in the previous week, as reported by the Energy Information Administration.


Federal Reserve and Oil Prices

Federal Reserve Chair Jerome Powell contributed to the upward momentum of various commodities, not just oil, with remarks that reinforced the central bank’s reluctance to raise interest rates further. This suggests that any decline in oil prices could serve as an intriguing entry point for those anticipating an extended period of elevated oil prices due to supply constraints and geopolitical tensions. The outlook for U.S. crude oil prices seems to revolve within the range of $80 to $100 per barrel.


Oil supply to go up

Nonetheless, there were adverse developments affecting oil sentiment this week. The United States granted Venezuela a six-month waiver from sanctions on its oil trade, following an agreement to hold free and fair elections in 2024 by the Maduro government.


Mixed perspectives on conflict’s Impact

Additionally, the almost daily confrontations between Israel and Hamas supporter Iran, which ranks as the fifth-largest oil producer, have raised concerns about potential repercussions on oil prices. Worries about retaliations by Israel and the United States against Iran have added to these concerns. This elevated risk premium on oil prices coincides with an already tight oil market. Traders are understandably cautious about events that could trigger sharp oil price movements.

 

Nevertheless, some oil traders view the Israel-Gaza conflict as a significant political event that has yet to demonstrate any tangible risks to the oil trade. Applying a daily war premium to oil due to this situation is seen by some as unwarranted.


China economy slows, negative for oil

In October, Chinese exports exceeded the expected decline due to worsening global demand, resulting in China’s trade surplus shrinking to its lowest level in 17 months, at $56.53 billion. Chinese exports fell by 6.4% year-on-year, a steeper drop than the anticipated 5.4% decline, primarily impacted by deteriorating economic conditions in major trading partners, Europe and the U.S.

 

As China plans a substantial $136 billion bond issuance to boost infrastructure spending, its export-focused sectors face further challenges, particularly amid a potential eurozone recession and rising U.S. interest rates. Despite Saudi Arabia and Russia extending output cuts, WTI oil prices hit below $80, influenced by mixed Chinese economic data and expectations of reduced crude runs by Chinese refiners, potentially contributing to further price declines.

 

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