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In the coming year or two, I expect traditional fossil fuel energy companies to continue to excel, rising to up to 30% of the S&P 500 in the upcoming years as technology stocks continue to shrink. Although I recommend Enphase Energy (ENPH) as well as Sociedad Quimica y Minera de Chile (SQM) that are prospering from the green revolution, the world cannot break away from fossil fuels anytime soon.
The Biden Administration released over 180 million barrels of crude oil from the Strategic Petroleum Reserve (SPR) in 2022 and drained the SPR to its lowest level in four decades. This SPR release pushed crude oil prices lower while artificially boosting U.S. GDP growth by shrinking the U.S. trade deficit. In fact, almost all the third-quarter GDP growth was attributable to the SPR release! Obviously, the Biden Administration cannot deplete the SPR much more in 2023, especially with a new Republican-led House, so energy prices are expected to resurge in 2023, when the SPR can no longer be tapped.
Russia remains the wild card for commodity markets. The G7’s $60 price cap on Russian crude oil is expected to fail, and Russia has refused to sell crude oil to any G7 nations. Due somewhat to the sanctions against Russian oil, Russia’s production is expected to decline 12% in 2023, which will likely put more upward pressure on crude oil prices. A ceasefire agreement between Ukraine and Russia would be welcome this year but so far remains elusive, so we are entering 2023 with continued uncertainty.
Russia on Tuesday officially banned the sale of crude oil and petroleum products to the G7 countries that imposed a $60 per barrel price cap on Russian crude oil. Hungary and other landlocked European Union (EU) nations are requesting exemptions from the G7 price caps on Russian crude oil. Price caps tend to fail, but in the interim, Russia’s ban on selling oil to the G7 will likely help to push oil prices higher.
Interestingly, the Financial Times reported that Western insurance companies are still covering crude oil shipments to China, India, and Turkey through December. However, under the G7 price cap agreement, Western insurers and logistics companies are only supposed to work with Russia if the buyers of crude oil are paying less than $60 per barrel. According to Kepler, a freight data and analytics company, from December 5th through December 25th, six tankers with Russia crude oil were headed to China, nine to India, and one to Turkey that were covered by Western insurance companies. Clearly, the implementation of the G7 $60 price cap and ban on Western insurers and logistics companies is not being fully enforced. Over time, sanctions and price caps tend to fail, and Russia is a master at circumventing price caps!
One thing that is certain is that the Fed desires to do whatever is necessary to squelch the high inflation they helped to cause. After the most aggressive series of rate hikes in decades, inflation is finally moderating. Whether or not the Fed can engineer a soft economic landing remains uncertain.
New Realities in Electricity Costs Cause EV Sales to Shrink
In other news last week, Tesla’s (TSLA) planned 8-day shutdown of its Shanghai plant is being extended through the end of January due apparently to rising Covid cases in China as well as slowing sales. The company now has sufficient inventory of its electric vehicles (EVs) and continues to offer discounts to try to sell its EVs amidst increasing competition in China. Furthermore, U.S. tax incentives to buy EVs have expired for Tesla in 2022, so in the U.S., Tesla is offering $7,500 discounts on Model 3s and Y EVs, plus 10,000 miles of free charging last month. The EV revolution may pick up as the inventory of EVs builds, since there is a growing inventory of EVs, so discounts as well as new 2023 tax incentives should help sell more EVs, as Tesla’s order backlog shrank from 476,000 in late July to 163,000 as of December 8th.
High electricity prices in Europe have caused EV sales to “go off track” according to Thomas Schmall, CEO of VW’s (OTCPK:VWAGY) components division. Schmall also said that the North American market is “speeding a little bit faster than we expected in the last months.” The ultimate irony is that in countries with cheap electricity, from coal or hydroelectric, EV sales remain healthy. On the other hand, countries with expensive electricity due to expensive green energy sources like wind are suddenly hitting EV resistance as their electricity costs rise. EV sales accounted for 6.8% of VW Group’s global third-quarter sales.
Speaking of EVs, the world’s largest lithium producer, Albemarle (ALB), expects that lithium prices will remain high for several years due to countries mandating EVs in upcoming years. Since 2020, the price of lithium has soared more than 1,000% to almost $80,000 per ton. As a result, EVs are now largely luxury vehicles, since battery costs have risen dramatically as the cost of cobalt, lithium, and nickel have soared from strong battery demand. Albemarle said that worldwide production of lithium was only 300,000 tons annually back in 2019 and the production of lithium is now growing by 200,000 tons per year. However, new lithium facilities are producing lower grades of lithium, which is also keeping prices high. Overall, Albemarle produces 130,000-140,000 tons of lithium via its facilities in Australia, Chile, and Nevada.
The International Energy Agency (IEA) said that coal consumption is due to hit an all-time record in 2022, due somewhat to the fact that Germany reactivated many of its closed coal plants, plus all the new coal plants in China and India. During the first two weeks of December, Germany’s coal consumption rose 49% compared to a year ago. Interestingly, the IEA also said that neither hydrogen nor batteries were ready to be deployed at scale. An acute battery shortage due to the transition to EVs means that large battery storage facilities remain cost-prohibitive, even though some battery storage facilities are being added in California. The real problem that Germany and many other European countries have are record-high electricity rates, so there is no desire at this time to increase electric rates further with expensive battery or alternative solutions, so coal looks like the next potential winner.
Due to the cold wave after the “Siberian Bomb Cyclone” that disrupted air travel just before Christmas, most of the continental U.S. has been enveloped by cooler-than-normal temperatures as well as record snow in places like upstate New York. Despite warming weather around New Year’s weekend, the price of natural gas is expected to remain very firm due to strong seasonal demand in both Europe and the U.S.
Russian Deputy Prime Minister Alexander Novak told the state news agency TASS that natural gas production would decline 12% and exports would decline about 25%. Prime Minister Novak earlier said that G7 price caps would cause Russia to reduce its crude oil production by 5-7%, which works out to 500,000-700,000 barrels per day. As a result, I expect that both natural gas and crude oil prices will meander steadily higher in the New Year due to tight supplies.
The other thing to watch in the New Year is the analyst community. Often when the analyst community gets back from skiing and their Christmas vacations, they tend to update their fourth-quarter earnings announcements. I, for one, will be curious to see if the analyst community will be revising their earnings estimates higher or lower in the first half of January before fourth-quarter announcements commence. Outside of the energy sector, expectations for earnings remain very low due to difficult year-over-year comparisons, as well as a strong U.S. dollar impeding profits of multinational companies.
The Wall Street Journal had a great article showing that the world is suddenly awash in semiconductor chips. The chip glut is due largely to the fact that consumers are buying fewer electronic items like personal computers and cell phones. Interestingly, despite a near-term glut, semiconductor manufacturers are still expecting semiconductor chip sales to double by 2030, as the “Internet of Things” requires chips to be installed in more consumer devices. As a result, guidance from semiconductor chip manufacturers in upcoming months, especially after their fourth-quarter earnings announcements, will be very important.
Some Final “Mixed” Economic Indicators to Close 2022
Some final sales indicators are that Mastercard reported last week that retail sales rose 7.6% between November 1st to December 24th compared to a year ago. Steep discounts and Black Friday sales aided the holiday sales increase. However, since inflation rose 8.5% in the past year, the 7.6% increase in holiday sales is still somewhat disappointing, since sales could not keep pace with the underlying inflation rate.
One key indicator – the ISM manufacturing index – is now signaling a recession after 30 straight months of expansion. The U.S. consumer remains surprisingly strong, but we are ending 2022 with persistent uncertainty, so recession fears are rampant. In my opinion, energy will remain the best oasis for investors.
Last Wednesday, the National Association of Realtors reported that pending home sales in November declined 4% compared to October. This was the sixth straight monthly decline and the lowest monthly home sales ever recorded, excluding the months immediately after the Covid pandemic commenced. In the past 12 months, pending home sales declined 37.8%. Hopefully, these weak home sales will show up in the Owner Equivalent Rent component in the Consumer Price Index (CPI) and Personal Consumption Expenditure (PCE) index, since that is the inflation component that the Fed is striving to contain.
And finally, the Labor Department on Thursday reported that unemployment claims rose to 225,000 in the latest week from a revised 216,000 in the previous week. Continuing unemployment claims increased to 1.710 million from a revised 1.669 million the previous week. Continuing unemployment claims have been steadily rising since October. However, unemployment claims are still too low to impact Fed policy, so a February 1st key interest rate hike remains likely due to rising Treasury bond yields last week.
Navellier & Associates owns Enphase Energy, Inc. (ENPH), Sociedad Quimica Y Minera De Chile S.A. (SQM), and Volkswagen Ag. (VWAGY), and a few accounts own Tesla (TSLA) per client request in managed accounts. Louis Navellier and his family own Enphase Energy, Inc. (ENPH), Sociedad Quimica Y Minera De Chile S.A. (SQM), and Volkswagen Ag. (VWAGY) via a Navellier managed account and Enphase Energy, Inc. (ENPH) in a personal account.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Disclaimer: Please click here for important disclosures located in the “About” section of the Navellier & Associates profile that accompany this article.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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