Oil's Wild Ride

Oil prices have been all over the place, like my nerves during an awkward family moment, ever since the pandemic started. Recently, it’s been a win for consumers and a challenge for producers, but things might be about to shift.

September 05, 2024

Silver banana goes to…

In this issue of the peel:

  • Oil prices have been all over the place, like my nerves during an awkward family moment, ever since the pandemic started. Recently, it’s been a win for consumers and a challenge for producers, but things might be about to shift.

  • GitLab’s latest quarter reminds us that Nvidia isn’t the only AI-related stock on the market, and Tesla’s gains confirm that AI has a lot more potential than just software. Further, it turns out it was possible for a cybersecurity stock to have a worse quarter than CrowdStrike, and Dick’s Sporting Goods joins other retailers in line to pick up its Prozac prescription.

  • There’s been just as much of a bull market in complaining as there has been in stocks so far in 2024. But, the gains are only reserved for our portfolios and therapists. Almost every asset class has had a banger of a year so far. But can it last?

Market Snapshot

Banana Bits

Welcome to the halftime show.

As we entered the third quarter of 2024, it was a good time to check the barometer for signs of what’s on the M&A horizon.

Will deal volume be up or down, and what will be the drivers? What about deal size? How is the U.S. presidential election going to influence things?

SRS Acquiom turned to more than 160 investment bankers and other M&A professionals to find out what they think—and compiled the resulting data into a quick reference guide.

Want to wow your MD with your knowledge of the M&A terrain? That might be a stretch, but you’ll definitely improve your chances if you download the Mid-Year M&A Outlook now. 

Macro Monkey Says

Oil’s Toil Gets Foiled

Like most people, oil prices want to get high.

Unfortunately, the commodity has ostensibly been administered a constant dose of NARCAN since mid-2022.

Yesterday, that dose only ramped up. Prices of U.S. crude oil futures hit a 9-month low yesterday morning, hitting a not-so-nice $69.19/bbl.

Let’s get into it.

What Happened?

As we discuss below, commodities have been the odd asset out amid a year of broad market gains thus far in 2024.

Year-to-date, U.S. crude oil spot prices have declined 1.31%. From an early April peak, prices are off 21.12%, officially entering bear market territory.

Much of the heavy lifting in that decline has emerged in the past week alone. Because oil prices are a good proxy of global economic growth, it’s important to understand exactly why.

Oil prices, like any other asset, increase alongside demand. As demand for energy increases, that implies an increase in energy utilization, which we can usually expect to translate into higher-than-otherwise GDP growth.

However, oil prices have their own cartel that controls the supply side of oil and, in effect, the prices of the asset class. Unfortunately, JPow doesn’t lead this one, and he can’t print new barrels exactly.

But OPEC certainly can.

OPEC, or the Organization of Petroleum Exporting Countries, is a group of primarily Middle Eastern countries that work together to maintain crude production at a certain level intended to achieve a certain price.

OPEC+, surprisingly not an oil rig-based streaming service, is basically the same thing but includes other countries that produce a ton of oil that isn’t called the United States. Russia is the main player, but many other countries are included:

Among the OPEC party, the U.S. has a lot in common with me—it’s not invited. Nevertheless, OPEC+ countries produce ~40% of the world’s crude oil and control ~80% of global proven reserves.

In effect, changes and anticipated changes in OPEC production manage the supply-side mechanism that dictates global crude prices. 

As oil prices had been gradually rising, OPEC+ countries figured they could get more bang for their barrel by increasing production. 

An indirectly planned 180k barrel-per-day increase beginning in October signaled that member countries expected the intended increase in production wouldn’t bring down prices too much. Unfortunately for them, China had other plans.

Macro woes in China from consumers and businesses alike have engendered concern that the world’s largest energy consumer would reduce oil demand. 

Arriving at the same time as the planned production increase, oil traders smelled trouble and sent lower prices.

And if that wasn’t enough, the U.S. has been attempting to prolong lower oil prices for the past four years leading up to this planned supply increase and sudden demand decrease.

In June of last year, the U.S.’s Strategic Petroleum Reserve—a reserve of petroleum used for strategic purposes—reached its lowest level in 40 years. Since then, reserves have been building back up, but domestic supplies have remained elevated.

It is unnecessary to point out to you economic geniuses that mechanism puts further downward pressure on oil prices—both domestically and globally.

The Takeaway?

Although, like most things in economics, there is rarely a time that feels “normal,” the post-pandemic era has been a particularly unusual time in the oil market.

The only people who want higher oil prices are probably on Greta Thunberg’s hit list, written in red ink. Consumers and non-energy companies alike are enjoying the cheap prices, but they likely won’t last long.

OPEC+ is incentivized to maintain and expand its margin, so let’s enjoy these low prices while they last.

What's Ripe

GitLab (GTLB) 21.64%

  • I really should’ve paid attention in my IT 101 class. Then, maybe I’d understand what a DevSecOps platform is, but apparently, it’s a good time to be one.

  • GitLab reported a 31% increase in revenue to $183mn and swung to a profit of $13mn last quarter, both beating estimates driven by a 126% retention ratio.

  • And that wasn’t even the best part. Large customers grew by 33%, which, combined with a high retention ratio, fired investors up for the next quarter.

Tesla (TSLA) 4.18%

  • After spending the day sh*t-talking competitors and Tweeting at randos, Tesla CEO Elon Musk’s usual shenanigans gave shares a much-needed bounce.

  • First, Musk called out Volkswagen, questioning where the automaker would scrounge up $5bn to invest in Rivian as planned. 

  • Then came a post highlighting the potential of the company’s nascent robotics unit, hyping up investors and factory workers alike.

  • But, the increased buying could be a reallocation given the stock’s 20% drop since July 10th. With Nvidia down, maybe the market smells of another AI leader…

What's Rotten

ZScaler (ZS) 18.67%

  • Imagine somehow having a worse quarter than CrowdStrike. Impossible right? Nope—leave it to ZScaler and their disappointing quarterly guidance.

  • The cybersecurity firm managed to beat expectations, pulling $0.88/sh on $593mn in revenue, but full-year guidance of $2.84/sh came up short.

  • Revenue guidance of $2.61bn came in line with estimates, but markets couldn’t overlook a weak earnings outlook, especially when Nvidia’s latest earnings have called the whole AI trade into question.

Dick’s Sporting Goods (DKS) 4.89%

  • This sporting goods retailer blew past estimates despite a tough quarter. Customers bought so many bats and balls that they could tell analysts to take a seat.

  • Dick’s Sporting Goods reported $4.37/sh against estimates for $3.83/sh on 8% revenue growth driven by 4.5% same-store sales growth, above calls for 3.6%.

  • However, soft guidance ruined the mood as the low-end earnings estimates came in below consensus. Like most other retailers, optimism is hard to find.

Thought Banana

Quitcha’

You’d think Shakespeare was writing his next great tragedy with the way market watchers have been covering the investing universe so far in 2024.

Like my dog acting terrified of everything in our new house, it’s as if pundits and peasants alike are looking for something to get upset about.

But, thankfully, numbers don’t lie. I was never the best at math, so stay with me here, but let’s check the tape of 2024 so far.

The Numbers

Traders describe a state of “flow” when completely absorbed in whatever they’re working on—it’s when they’re firing on all cylinders and, at times, can feel on top of the world.

It appears that markets themselves have borrowed from this playbook in recent months and years. The classic 60/40 portfolio—60% stocks and 40% bonds—was tortured worse than Theon Greyjoy for a while in the post-pandemic era, but now…

As Bloomberg points out, funds tracking vital asset classes have posted gains entirely in unison for four months in a row. According to Bloomberg, “It’s the longest stretch of correlated gains since at least 2007.”

Observing simultaneous advancement in these disparate asset classes got us thinking—how are other uncorrelated assets doing so far this year?

Like a typical frat party, everybody’s fired up.

Of course, you have a couple of guys brooding in the corner, in this case, oil and all commodities aggregated together. However, most of that could be attributable to the strength of the U.S. Dollar.

However, the headlining story remains—nearly every class is firing on all cylinders in 2024. Markets around the world have been in a state of “flow” all year.

The Takeaway?

It’s about time we follow Ferris Bueller’s advice. To paraphrase, “Markets move pretty fast. If you don’t stock and look around once in a while, you could miss it.”

Recession worries, a pending U.S. election, multiple wars around the world—it’s not as if there’s no reason to be concerned.

But next time, just take another look at your portfolio before you get down bad about the future. And most of all, quitcha’ b*tchin’.

The Big Question: How long can uncorrelated assets maintain broadly correlated returns? Can we expect similar unison in a potential move to the downside?

Banana Brain Teaser

Previous

Andrew started saving at the beginning of the year and had saved $240 by the end of the year. He continued to save and by the end of 2 years had saved a total of $540. What is the closest percent increase in the amount Andrew saved during the second year compared to the amount he saved during the first year?

Answer: 25%

Today

A survey of employers found that during 1993, employment costs rose 3.5%, where employment costs consists of salary costs and fringe-benefit costs. If salary costs rose 3% and fringe-benefit costs rose 5.5% during 1993, then the fringe-benefit costs represented what % of employment costs at the beginning of 1993?

Send your guesses to [email protected]

❝

The goal of education is not to increase the amount of knowledge but to create the possibilities for a child to invent and discover, to create men who are capable of doing new things.

Jean Piaget

How Would You Rate Today's Peel?


Happy Investing,
David, Vyom, Ankit & Patrick