Month: April 2022

Today, the 10 richest people in the world control $1.3 trillion in wealth.

As Visual Capitalist’s Dorothy Neufeld details below, this scale of wealth is equal to approximately 1.4% of the world economy, Amazon’s entire market cap, or spending $1 million a day for 3,000 years. In fact, it’s double the amount seen just two years ago ($663 billion).

As billionaire wealth accumulates at a remarkable speed, we feature a snapshot of the world’s richest in 2022, based on data from the Forbes Real-Time Billionaires List.

Top 10 Richest People in the World

Elon Musk, with a fortune of $212 billion, is the richest person on the planet.

Tesla delivered nearly one million vehicles globally in 2021. Despite facing a computer chip shortage, Tesla deliveries rose 87% year-over-year. Musk, who is also CEO and chief engineer of SpaceX, plans to send the largest rocket ever built into orbit in 2022. It spans 119 meters tall.

Here are the richest people in the world, based on data as of March 14, 2022:

With a net worth of $168 billion, Jeff Bezos falls in second place. Bezos is the only billionaire in the top 10 to see a decline in wealth (-$9 billion) over the year. Since last March, Amazon shares have risen just 3% in light of weaker earnings and lagging retail performance.

Most notably, Mark Zuckerberg, CEO of Meta (formerly Facebook) fell off the top 10 for the first time since 2016. Meta shares plunged after reporting the first-ever drop in global daily active users since 2004.

Growth Rates of the Top 10 Overall

Among the 10 richest people in the world, here’s who saw their wealth rise the fastest:

Musk saw his fortune rise more than any other in this top 10 list. In 2021, Tesla became a trillion-dollar company for the first time, and Musk’s wealth jumped by 29% over the past year.

Crypto Billionaires in 2022

At least 10 people worldwide have seen their wealth climb into the billions thanks to the stratospheric rise of cryptocurrencies.

Sam Bankman-Fried, founder of the FTX crypto derivatives exchange, is at the top, with a jaw-dropping $24 billion net worth. Bankman-Fried launched the exchange in 2019 when he was 27.

FTX now has one million users and a $32 billion valuation.

 

Following Bankman-Fried is Brian Armstrong, the co-founder of cryptocurrency exchange Coinbase. It is the second-largest cryptocurrency exchange globally after Binance.

 

Also on the list are co-founders of Gemini cryptocurrency exchange Cameron and Tyler Winklevoss, each with a net worth of $4 billion. Like their rival, Mark Zuckerberg, they have their sights on building a metaverse.

Larger Shifts

Will billionaire wealth continue to accumulate at record rates? If the invasion of Ukraine presses on, it will likely have broader structural outcomes.

Some argue that war is a great leveler, a force that has reduced wealth inequality, as seen in the aftermath of WWII. Others suggest that it increases wealth divergence, especially when the war is financed by public debt. Often, costs have become inflated due to war, putting pressure on low and middle-income households.

Whether or not the war will have lasting effects on wealth distribution is an open question, however, if the pandemic serves as any precedent, the effects will be far from predictable.

By Ronan Manly of Bullionstar.com

With Russia’s central bank having just profoundly altered the international trade and monetary system by linking the Russian ruble to both gold and commodities, journalists in Moscow asked me to write a Q and A article on what these developments mean, and the ramifications of these changes on the Russian ruble, the US dollar, the gold price and the global system of currencies. This article has been published on the RT.com website here. 

Since RT.com is now blocked and censored in many Western locations such as the EU, UK, US and Canada, and since many readers may not be able to access the RT.com website (unless using a VPN), my Questions and Answers that are in the new RT.com article are now published here in their entirety.

Who would have thought that citizens of ‘free speech’ Western countries would need a VPN to read a Russian news site?

Why is setting a Fixed Price for Gold in Rubles significant?

By offering to buy gold from Russian banks at a fixed price of 5000 rubles per gram, the Bank of Russia has both linked the ruble to gold and, since gold trades in US dollars, set a floor price for the ruble in terms of the US dollar.

We can see this linkage in action since Friday 25 March when the Bank of Russia made the fixed price announcement. The ruble was trading at around 100 to the US dollar at that time, but has since strengthened and is nearing 80 to the US dollar. Why? Because gold has been trading on international markets at about US$ 62 per gram which is equivalent to (5000 / 62) = about 80.5, and markets and arbitrage traders have now taken note, driving the RUB / USD exchange rate higher.

So the ruble now has a floor to the US dollars, in terms of gold. But gold also has a floor, so to speak, because 5000 rubles per gram is 155,500 rubles per troy ounce of gold, and with a RUB / USD floor of about 80, that’s a gold price of around $1940. And if the Western paper gold markets of LBMA / COMEX try to drive the US dollar gold price lower, they will have to try to weaken the ruble as well or else the paper manipulations will be out in the open.

Additionally, with the new gold to ruble linkage, if the ruble continues to strengthen (for example due to demand created by obligatory energy payments in rubles), this will also be reflected in a stronger gold price.

What does this mean for Oil?

Russia is the world’s largest natural gas exporter and the world’s third largest oil exporter. We are seeing right now that Putin is demanding that foreign buyers (importers of Russian gas) must pay for this natural gas using rubles. This immediately links the price of natural gas to rubles and (because of the fixed link to gold) to the gold price. So Russian natural gas is now linked via the ruble to gold.

The same can now be done with Russian oil. If Russia begins to demand payment for oil exports with rubles, there will be an immediate indirect peg to gold (via the fixed price ruble – gold connection). Then Russia could begin accepting gold directly in payment for its oil exports. In fact, this can be applied to any commodities, not just oil and natural gas.

What does this mean for the Price of Gold?

By playing both sides of the equation, i.e. linking the ruble to gold and then linking energy payments to the ruble, the Bank of Russia and the Kremlin are fundamentally altering the entire working assumptions of the global trade system while accelerating change in the global monetary system. This wall of buyers in search of physical gold to pay for real commodities could certainly torpedo and blow up the paper gold markets of the LBMA and COMEX.         

The fixed peg between the ruble and gold puts a floor on the RUB / USD rate but also a quasi-floor on the US dollar gold price. But beyond this, the linking of gold to energy payments is the main event. While increased demand for rubles should continue to strengthen the RUB / USD rate and show up as a higher gold price, due to the fixed ruble – gold linkage, if Russia begins to accept gold directly as a payment for oil, then this would be a new paradigm shift for the gold price as it would link the oil price directly to the gold price.  

For example, Russia could start by specifying that it will now accept 1 gram of gold per barrel of oil. It doesn’t have to be 1 gram but would have to be a discounted offer to the current crude benchmark price so as to promote take up, e.g. 1.2 grams per barrel. Buyers would then scramble to buy physical gold to pay for Russian oil exports, which in turn would create huge strains in the paper gold markets of London and New York where the entire ‘gold price’ discovery is based on synthetic and fractionally-backed cash-settled unallocated ‘gold’ and gold price ‘derivatives.

What does this mean for the Ruble?

Linking the ruble to gold via the Bank of Russia’s fixed price has now put a floor under the RUB/ USD rate, and thereby stabilized and strengthened the ruble. Demanding that natural gas exports are paid for in rubles (and possibly oil and other commodities down the line) will again act as stabilization and support. If a majority of the international trading system begins accepting these rubles for commodity payments arrangements, this could propel the Russian ruble to becoming a major global currency. At the same time, any move by Russia to accept direct gold for oil payments will cause more international gold to flow into Russian reserves, which would also strengthen the balance sheet of the Bank of Russia and in turn strengthen the ruble.

Talk of a formal gold standard for the ruble might be premature, but a gold-backed ruble must be something the Bank of Russia has considered.     

What does this mean for Other Currencies?

The global monetary landscape is changing rapidly and central banks around the world are obviously taking note. Western sanctions such as the freezing of the majority of Russia’s foreign exchange reserves while trying to sanction Russian gold have now made it obvious that property rights on FX reserves held abroad may not be respected, and likewise, that foreign central bank gold held in vault locations such as at the Bank of England and the New York Fed, is not beyond confiscation.      

Other non-Western governments and central banks will therefore be taking a keen interest in Russia linking the ruble to gold and linking commodity export payments to the ruble. In other words, if Russia begins to accept payment for oil in gold, then other countries may feel the need to follow suit.

Look at who, apart from the US, are the world’s largest oil and natural gas producers – Iran, China, Saudi Arabia, UAE, Qatar. Obviously, all of the BRICS countries and Eurasian countries are also following all of this very closely. If the demise of the US dollar is nearing, all of these countries will want their currencies to be beneficiaries of a new multi-lateral monetary order.  

What does this mean for the US Dollar?

Since 1971, the global reserve status of the US dollar has been underpinned by oil, and the petrodollar era has only been possible due to both the world’s continued use of US dollars to trade oil and the USA’s ability to prevent any competitor to the US dollar.

But what we are seeing right now looks like the beginning of the end of that 50-year system and the birth of a new gold and commodity backed multi-lateral monetary system. The freezing of Russia’s foreign exchange reserves has been the trigger. The giant commodity strong countries of the world such as China and the oil exporting nations may now feel that now is the time to move to a new more equitable monetary system. It’s not a surprise, they have been discussing it for years.  

While it’s still too early to say how the US dollar will be affected, it will come out of this period weaker and less influential than before.      

What are the Consequences of these Developments?

The Bank of Russia’s move to link the ruble to gold and link commodity payments to the ruble is a paradigm shift that the western media has not really yet been grasped. As the dominos fall, these events could reverberate in different ways. Increased demand for physical gold. Blowups in the paper gold markets. A revalued gold price. A shift away from the US dollar. Increased bilateral trade in commodities among non-Western counties in currencies other than the US dollar.

Vice President Kamala Harris was asked during a Friday appearance on MSNBC by show host Joy Reid her view on President Biden’s regime change comments directed at Russia’s Vladimir Putin the prior Saturday in Warsaw. In line with White House efforts in the days following Biden’s speech, she too sought to walk back any suggestion that Washington is actively seeking Putin’s overthrow, saying “we are not into regime change.” 

“Let me be very clear. We are not into regime change. And that is not our policy. Period,” Harris told Reid. She said this after rambling on for a couple of minutes in response to what was initially a simple yes or no question of “whether he [Putin] should remain” in power. The segment started with Reid asking “President Biden said Vladimir Putin should no longer be leader of Russia, do you agree?“

Kamala Harris was asked if she backs regime change in Russia. Harris the US will support the Ukrainian whilst making sure Putin faces consequences. pic.twitter.com/NXftPM6tC5

— Apex World News (@apexworldnews) April 2, 2022

She explained further in reaction to Biden’s prior “For God’s sake, this man cannot remain in power” remarks…  

“Our policy from the beginning has been about ensuring that there are going to be real costs exacted against Russia in the form of severe sanctions, which we know are having a real impact and an immediate impact, not to mention the longer-term impact, which is about saying there’s going to be consequence and accountability when you commit the kinds of atrocities that he is committing,” VP Harris said.

And here’s the moment she dubiously stated that the US doesn’t do regime change…

JOE BIDEN: “For God’s sake, [Putin] cannot remain in power.”

KAMALA HARRIS: “We are not into regime change, and that is not our policy. Period. Yeah.”

So… which is it? pic.twitter.com/syH1EJ6jeh

— RNC Research (@RNCResearch) April 2, 2022

We should immediately point out the obvious concerning her assertion… given the glaring examples of Iraq, Afghanistan, Libya, Syria – or even going back to the 1953 Iranian coup d’état, or the 1980’s CIA role in Central America – one could argue that in recent history that regime change has in fact been US policy across various parts of the globe.

The Sunday after Biden’s controversial Warsaw speech, which the Kremlin rejected and condemned – but also said wouldn’t match in terms of escalatory rhetoric – Antony Blinken became the highest US official to try and downplay the president’s words. 

“I think the president, the White House, made the point last night that, quite simply, President Putin cannot be empowered to wage war or engage in aggression against Ukraine or anyone else,” the top US diplomat told the Sunday news shows.

To recall, here are Biden’s words from the prior Saturday in Warsaw, where he said the quiet part out loud…

Biden said the quiet part out loud “[Putin] cannot remain in power” & now everyone knows the real intention is “Regime Change” in Russia. No amount of spin can change that now. U.S. is run by warmongering psychos pic.twitter.com/Z5NOfcG88E https://t.co/ZnZeOu1fB9

— Jimmy Dore (@jimmy_dore) March 26, 2022

By Naveen Athrappully of The Epoch Times

The U.S. Justice Department has announced a 21-count superseding indictment that charged 12 individuals with conspiring to violate federal firearms statutes after they trafficked over 90 guns from Tennessee and Kentucky areas into Chicago.

Among those charged, three were enlisted members of the U.S. Army at the time of the crime. Stationed at the Fort Campbell military installation in Clarksville, Tennessee, they were involved in the purchase and transfer of “dozens of firearms to the streets of Chicago,” an April 1 press release from the department said. The three individuals—Demarcus Adams, Brandon Miller, and Jarius Brunson—were arrested in May last year by agents from the Bureau of Alcohol, Tobacco, Firearms, & Explosives.

Nine of the remaining 12 individuals are members of the Gangster Disciples street gang based in the neighborhood of Pocket Town, Chicago.

According to the Justice Department, the nine “conspired to purchase and deliver over 90 illegally obtained firearms” to the Chicago area between December 2020 and April 2021.

Their actions facilitated the “ongoing violent disputes” between Gangster Disciples and rival gangs. To secure firearms from federally licensed dealers, the defendants provided false information on firearms purchase application forms.

The multiple counts charged against the defendants include engaging in dealing firearms without a license, making false statements to a federally-licensed firearms dealer, conspiring to commit money laundering, transporting and receiving firearms into another state, and so on. The defendants face a prison term of up to 20 years on one or more of the charged counts.

“The Justice Department recognizes that fighting violent crime requires approaches tailored to the needs of individual communities,” Attorney General Merrick B. Garland said.

“But gun violence can be a problem that is too big for any one community, any one city, or any one agency to solve. That is why our approach to disrupting gun violence and keeping guns out of the hands of criminals rests on the kind of coordination you see here today.”

According to the feds, the guns trafficked as part of the crime have been used in several shootings across Chicago. This includes a mass shooting in March 2021 at the 2500 block of West 79th Street, which left seven people wounded and one dead. The incident had led authorities to investigate and uncover the interstate gun trafficking network.

Gun violence in Chicago has seen a massive surge in recent years. In Cook County, which includes Chicago and surrounding suburbs, 1,002 gun-related homicides were reported in 2021, the county medical examiner’s office said in early January. This is almost double the number reported in 2019 and 121 more incidents than what was recorded in 2020.

In total, Chicago saw 3,561 shooting incidents last year, according to the police department. This is 1,415 more shootings than in 2019.

Unfortunately for the CCP bureaucrats in charge of China’s largest city, the punishing 9-day staggered lockdown imposed late last month on Shanghai has failed to suppress the omicron driven outbreak in the city. Instead,  cases have continued to rise, prompting authorities to expand the scope of what was supposed to be a short-lived staggered freeze to cover the city’s entire population.

The eastern half of Shanghai remains under tight movement restrictions even after a four-day lockdown was supposed to have ended Friday morning. This means the entire city of roughly 26 million is currently under some form of restrictions as the lockdown in the western half of the city begins, Bloomberg reports.

While the lockdown of Shanghai’s east officially ended at 5 a.m. local time Friday, most residents were not able to leave their homes immediately under what the local government described as a tiered quarantine regime.

People with mild or no symptoms are required to be put under compulsory central quarantine for treatment or monitoring at mostly makeshift facilities built in massive gymnasiums or exhibition centers around the city. If parents with young kids are sent to central quarantine, authorities will try to help find volunteers or staff to look after the children left behind, Zeng Qun, deputy head of Shanghai Civil Affairs Bureau said at a briefing.

The rules also required anyone living in a building where a Covid case has been reported to stay confined in their home for two weeks. Residents of other buildings in the same compound as the block where a positive patient was reported will be subject to seven-day home quarantine.

Thanks to these “targeted” restrictions, nearly all of the nearly 9 million residents living in the eastern half of Shanghai were still subject to some form of COVID restrictions. Nearly 40% of Saturday’s newly reported infections in the city came from Pudong, the eastern part.

Now that the outbreak in Jilin Province has subsided (a punishing multi-week lockdown in that province has finally been lifted), Shanghai has emerged as the epicenter of China’s worst virus outbreak since the early days of the pandemic. The financial center’s daily case count has surged from less than five at the beginning of March to a peak of more than 6,300 on Friday.

“At present, the epidemic situation is severe and complex, and the task of prevention and control is extremely arduous,” Wu Qianyu, an official at the Shanghai municipal health commission, said at a media briefing.

To be sure, it’s likely that the increase in new cases is a result of further screening. Authorities tested more than 14 million people in the western half of the city Friday as part of two-round tests.

Last month, President Xi Jinping instructed local authorities to take a more nuanced approach to combating COVID. While preserving human life must remainthe priority, the president urged policy makers to embrace more “targeted” measures – including an increase in testing and locally-focused lockdowns on residential complexes where cases had been confirmed.

But the continuing spread of the virus in Shanghai is the biggest test yet of Xi’s plan to preserve economic growth without sacrificing lives. Amid reports of deaths of old folks homes and a surge in medical emergencies, local public health authorities have ordered hospitals and clinics across the city to reopen emergency wards amid reports that people were being denied access to treatment during the lockdown. There has even been a case of one individual dying after being turned away from a hospital due to COVID protocols, according to the SCMP.

Meanwhile, authorities have employed robot emissaries like this robot dog to bark instructions at local residents as the citywide testing campaign continues.

¿Alguien sabe si éste video es verdad? Dónde lo encontré mencionaba que son perros robot vigilando las calles de Shanghai para que la gente no salga después de el confinamiento que se les impuso. pic.twitter.com/Zf9qMvUFk8

— Diego (@Diego_da18) April 2, 2022

While millions of Chinese will likely suffer as the government scrambles to provide enough food, medicine and other emergency supplies to the increasingly desperate population, there’s one individual who stands to benefit: President Joe Biden. Assuming news of the tighter lockdown sends crude oil prices lower, Biden might be able to take credit, given the timing of the SPR release announcement earlier this week (although few sell-side analysts expect the decision to have a meaningful impact on prices long term).

Authored by Mimi Nguyen Ly via The Epoch Times (emphasis ours),

The Biden administration announced on April 1 it is raising requirements for fuel efficiency, reversing a rollback by the Trump administration.

New vehicles sold in the United States will have to travel an average of at least 49 miles per gallon of gasoline in 2026 under the new federal rules. The requirement would have been at 32 mpg if going by rules under the Trump administration.

Specifically, the National Highway Traffic Safety Administration (NHTSA) said fuel efficiency requirements will increase by 8 percent annually for 2024 and 2025 model years, and 10 percent annually for model year 2026.

The Trump administration had in March 2020 rolled back fuel efficiency requirements to 1.5 percent annual increases through 2026. The Obama administration had required 5 percent annual increases.

The new regulation (pdf) marks a slightly bigger increase than the proposal outlined in August 2021 by the NHTSA in a joint rule-making process with the Environmental Protection Agency (EPA), as part of efforts to improve gas mileage and reduce tailpipe pollution.

The EPA announced similar rules (pdf) in December 2021.

Transportation Secretary Pete Buttigieg said the new rule “means that American families will be able to drive further before they have to fill up, saving hundreds of dollars per year.”

NHTSA estimates (pdf) that under the rule, consumers could save $1,387 in fuel costs over the life of a vehicle. but the average cost of a new vehicle would also increase by almost that much—$1,087.

Vacation home purchases are cooling as US mortgage rates continued their near-vertical ascent, soaring to levels not seen since late 2018. 

A new Redfin Corp. report, cited by Bloomberg, says the rush by affluent Americans, mainly white-collar, to purchase second homes dropped in February to the lowest level since May 2020. Though demand is still up 35% above pre-pandemic levels, the vacation housing market will cool as rates rise. 

Before the pandemic, demand for second and primary homes grew at similar rates. But pandemic lockdowns and the Federal Reserve’s easiest monetary policies on record, coupled with FOMO and low inventory, unleashed a surge in buying panic in beach towns and mountain areas. 

Redfin Chief Economist Daryl Fairweather said soaring mortgage rates and rising home prices amid low inventory had slowed the boom. He said the second-home market is being impacted “much harder than the primary-home market, largely because vacation homes are optional. People don’t need a second home.” 

Redfin data showed secondary home demand peaked in March 2021 when the average 30-year mortgage tagged a record low of 2.65%. Rates have since jumped over the last year, hitting as high as 4.89%, sending ‘affordability’ spiraling lower. 

For some context, the Fed’s move to quell inflationary forces by embarking on a super aggressive hiking cycle has driven mortgage rates on one of the fastest three-month rises since 1994.

The rapid rise in rates has also sent primary-home buyers to the sidelines as housing affordability becomes a significant challenge. 

Secondary home buyers also face another hurdle, including a fee of an additional 1% to 4% for loans backed by Fannie Mae or Freddie Mac. 

Given extraordinary supply challenges, housing prices are likely to remain elevated this year despite plunging housing affordability. This means 2022 could be the hurrah for the housing market as the cracks are beginning to appear as vacation home markets cool. 

Via GoldMoney Insights,

Brent crude oil prices rallied $100/bbl since the lows in 2020. This reflects very tight fundamentals, where petroleum inventories are at extremely low levels relative to consumption and supply is struggling.

The war in the Ukraine has worsened the near-term supply outlook further.

The current conditions in the oil market are critical and we could see real oil shortages by this summer if the disruptions to Russian oil supplies persist or even worsen. This would put even more upward pressure on current prices and overall inflation. However, we think an even bigger and more permanent issue has been brewing in oil markets for years and it is finally filtering through to the back end of the forward curve.

Longer dated prices have broken out of their 5-year range and have been moving up relentlessly.

We think the oil markets finally begin to understand that a lack of investments in large oil projects over the past years is threatening supply over the entire next decade, at a time when demand will still be growing as the electrification of the transportation sector will not impact demand meaningfully for years to come.

The sharp upward moves in oil prices amidst a broader commodity prices rally have pushed realized inflation and near-term (0-2y) inflation expectations up strongly. But inflation expectations beyond that time horizon have proven to be resilient. So far the back end of the oil curve moved up only $15/bbl. However, we think that once back end prices are moving in a similar fashion to what we currently witness in the front, longer term inflation expectations will likely begin to move up too.

In this two part report, we look first at how we got to the current price environment and in the upcoming second part we do a deep dive into the long term outlook for crude oil markets.

Oil prices have reached the highest levels since the all-time highs in 2008. The most obvious explanation for the sharp rally is the military conflict in Ukraine and the threat of a loss of Russian oil supplies. However, oil prices are only up $20 since the war started a month ago. In fact, Brent crude oil prices have been rising relentlessly ever since the lows of around $20/bbl we saw during first lockdowns in spring 2020, to $95/bbl just before the invasion (see Exhibit 1).

Exhibit 1: Oil priced rallied close to $80/bbl from their lows before the Ukraine invasion started

$/bbl

Source: Goldmoney Research

While everybody points to the Ukrainian conflict to explain high prices, just a month ago there was a vigorous debate among analysts, media, and politicians about what was behind the fact that oil had broken out of the $60-80 range it has mostly been trading in for the past years (except the quick lockdown crash in early 2020) and started to rally relentlessly. Was it exceptional demand, reflective of a strong economy coming out of the pandemic as some claimed? Or rather supply bottlenecks, similar to the supply issues that plagued many other industries at the moment. Was it OPEC? Or just broad based inflation filtering into oil, given that almost any other commodity has shown similar or even higher price increases over the past two years.

First, it wasn’t (and still isn’t) exceptionally strong demand. While global oil demand has significantly recovered from the lows in spring 2020, for 2022 it is still slightly below where it was before the pandemic (see Exhibit 2).

Exhibit 2: Global oil demand has strongly recovered but remains below pre-pandemic levels so far

Mb/d, 12 month moving average, change vs 2019

Source: Goldmoney Research

This means it is lagging overall economic activity, which, according to the World Bank and the IMF, is roughly 7% higher in 2022 than it was in 2019 (see Exhibit 3). A rule of thumb is that global oil demand grows roughly at the rate of GDP -2% efficiency gain per annum. In this case, a 7% GDP growth over two years plus 2% compounded efficiency gains would suggest that oil demand – if it wasn’t for the remnants of the pandemic – should be roughly 1 million b/d above 2019 levels.

Exhibit 3: cumulative changes to real GDP vs 2019

%

Source: IMF

The reason why oil demand is lagging is mostly due to the lack of jet fuel demand. Jet fuel accounts for about 10% of global oil demand and air traffic is still quite a bit lower than it was before the pandemic. Globally commercial air traffic is still down 20% vs. pre-pandemic levels according to Flightradar24, a site tracking commercial air traffic (see Exhibit 4).

Exhibit 4: Commercial flight activity is still 20% below pre-pandemic levels

Source: Flightradar24.com

During the first wave of the Covid19 pandemic, oil demand crashed like it never had before. At it’s lowest point, oil demand was down 20%. As a comparison, during the great recession of 2008-2009, oil demand was down just about 3.5% at any point in time (see Exhibit 5).

Exhibit 5: The demand destruction from the lockdowns dwarfed the demand destruction from the recession that followed the 2008-2009 credit crisis

Kb/d year-over-year

Source: Goldmoney research

This demand destruction in early 2020 lead to a massive build in global inventories. Global total petroleum stocks rose at the fastest rate and reached their highest levels in history as producers didn’t curb production fast enough (see Exhibit 6).

Exhibit 6: Total commercial petroleum’s stocks, including floating storage, reached their highest levels in history in 2020

Kb

Source: Goldmoney Research

Which is where OPEC+ comes in. After taking a very different direction during the February meeting (Saudi Arabia, upset about Russia’s refusal to agree to production cuts, ramped up production to all-time highs and flooded the market with crude, promptly crashing prices), OPEC+ swiftly decided to act when it became clear what the global lockdowns did to demand. The group cut oil production by around 10 million b/d (see Exhibit 7). And surprisingly, all group members stuck to their quotas since that decision was made.

Exhibit 7: OPEC swiftly cut production by a record amount when the effects of the lockdowns on demand became clear

Kb/d (OPEC crude oil only, auxiliary states in OPEC+ not included)

Source: Goldmoney Research

Subsequently, the group provided a roadmap for the return of these barrels. For the first couple months of this oil production recovery, OPEC+ was careful that the oil market remained in deficit. As a result, oil inventories kept falling until they reached their 5-year average in mid-summer 2021 (se Exhibit 8).

Exhibit 8: Global petroleum stocks were back to 5-year averages by mid-summer 2021

Kb, levels vs 5-year average

Source: Goldmoney Research

However, actual OPEC+ production is lagging the quotas for many months now, and the gap between actual and target becomes increasingly wider. The reason is that some of the smaller OPEC members struggle to produce as much as they would be allowed under the plan (see exhibit 9). These are not voluntary cuts. It has become obvious that the capacity of many OPEC members simply isn’t there as these countries are plagued with domestic issues that prevent full production. On top of that, the non-OPEC members of OPEC+ are also producing about 200kb/d below their quotas, and that was before the war in Ukraine reduced Russian exports.

Exhibit 9: Many OPEC members keep producing below their quotas

Kb/d

Source: OPEC

Interestingly, the core OPEC members Saudi Arabia, UAE, and Kuwait are for once not stepping in to fill the gap. In our view, this may be partially politically driven due to some tensions between the US and some OPEC members, but more likely it is also due to their own capacity constraints. In April 2020, Saudi Arabia briefly ramped up production to 12mb/d as the Kingdom reacted to Russia’s’ refusal to commit to a production cut (see Exhibit 10). This strategy backfired as it meant raising output right into the largest demand crash in history. However, it does give some insights to what Saudis production capacity is. We think Saudi Arabia went beyond their sustainable production capacity at that time. It is unlikely that they could sustain this output level for an extended period. Their production capacity for the medium term is likely closer to 11-11.5mb/d. Any capacity increase would require substantial investments in our view, and it would take years to achieve.

Exhibit 10: Saudi Arabia demonstrated that they can push production to 12mb/d over a very brief period, but sustainable production capacity is likely significantly lower

Source: Goldmoney Research, OPEC

While Saudi Arabia is still producing below their sustainable capacity, the country can’t really step in and fill the production gaps left by the less stable OPEC producers, as it would mean it could not increase production anymore when it is supposed to according to the OPEC+ roadmap. The country has no choice but to stick to their own predetermined production path. The same is true for other core-OPEC members. As a result, demand continued to exceed production in 1Q22 at a time when in theory, we should have already shifted to an oversupply in the first two months of the year.

This has pushed global inventories lower and lower. As we have explained in earlier reports, there is a very strong relationship between the level of inventories and crude oil time-spreads, the difference between the prompt prices and longer-dated prices on the forward curve (see Exhibit 11). In a nutshell, when inventories are low, consumers of a commodity – in this case petroleum products – are willing to pay a premium for immediate delivery. It is preferable to pay this premium than to face the risk of having to shut down the business because they run out of oil (jet fuel, diesel etc.). In such a situation, prompt prices trade over future prices which is called “backwardation”. When inventories are high, consumers have no preference for immediate delivery. Instead, storage, insurance, and financing costs mean that consumers rather not sit on inventories, but would prefer delivery in the future. In that situation, prompt prices will trade below forward prices and the curve is in “contango”.

Exhibit 11: Crude oil time-spreads are inversely correlated to inventories

% time-spread 1-60 months, prediction based on inventory levels

Source: Goldmoney Research

The extent to which a forward curve is in backwardation or contango is strongly correlated to the level scarcity or abundance of inventories relative to demand. At the moment, we see an extreme level of backwardation in the front of the curve. The market signals extreme scarcity of oil stocks and the risk of further supply shortages. This is the result of the persisting undersupply discussed above that led to a situation of very low inventories, but also due to concerns over potentially even larger shortages due to missing Russian crude oil supplies.

To what extent the Ukraine conflict has exacerbated this issue from a fundamental perspective is difficult to assess at the moment. So far the US is the only nation that has outright banned imports of Russian oil and products. While this might create challenges for some refiners that rely on specific grades of imported Russian crude, it doesn’t alter the global supply and demand picture. US refiners will be forced to switch to an alternative grade but the Russian crude that used to go to the US (only about 670kb/d in 2021, of which 200kb/d was crude and the rest products, mostly fuel oil and VGO that was used in the US refinery system) will find its way to Asia (see Exhibit 12).

Exhibit 12: US import volumes of Russian petroleum are relatively small

Kb/d

Source: Goldmoney Research, EIA

The EU has imposed some sanctions on Russia that impact the commodity sector overall, but it has so far refrained from banning energy imports. However, over the past weeks it has become apparent that the voluntary sanctioning by Western companies – sometimes as a result of public outcries – is having an impact on Russia ability to export crude to the West regardless. There have been several reports that international commodity trading giants were forced to offer Urals (a Russian crude oil grade) at discounts of up to $30/bbl as they could not find a willing buyer. Russian crude exports are dependent on pipeline flows to Europe. These flows can’t be entirely substituted by seaborne exports at the moment. Hence the reluctance of Western oil firms, merchants, banks, shippers, seaports, and insurance companies to refrain to deal with Russian entities or outright stop dealing with anything that could be related to Russia can still lead to substantial reduction of Russian exports even as there is no legal ban. At the moment this probably affects around 1mb/d of Russian crude supplies. On top of that, Russia just announced that the CPC pipeline – a Kazakh-Russian Caspian Pipeline Consortium – is undergoing unplanned maintenance of up to two months, reducing global supplies by a further 0.5mb/d.

Exhibit 13: Russian oil and gas exports are dependent on pipeline flows to Europe

Source: National Geographic https://www.nationalgeographic.org/photo/europe-map/

On the flip side, IEA member states agreed to release 60mb of petroleum from their strategic reserves to alleviate the current shortages. Most of it will come from the US, and 29 other countries have committed to smaller volumes. However, that covers the current losses from Russia by just one to two months. The US had already orchestrated a coordinated SPR release last November to deal with high prices prior to the Ukraine war. The reaction was a short sell-off and an immediate recovery with prices pushing much higher.

There is no easy way to predict how this picture changes over the coming months.

• It’s certainly key how the Ukrainian conflict progresses. On one hand, Europe is unlikely to ban oil and gas imports unless the conflict escalates in a dramatic way. On the other hand, while European sanctions are unlikely to be eased in the short term even if Ukraine and Russia come to some sort of agreement, such a scenario would likely ease the pressure on Western firms to maintain their voluntary sanctions.

• Core-OPEC members do have spare capacity, and they will bring it back as planned and not faster. But they run out of spare capacity in 2H2022.

• US production is also growing again, but not unlike OPEC, the shale oil producers made clear that they are also sticking to their production targets and are undeterred by higher prices, Non-OPEC (non-shale) production is growing as well, but it is recovering from the declines over the past 2 years rather than incrementally growing. This means it’s a one off and most of the increase have already happened.

• Finally, there is a significant chance that the Iranian nuclear deal will be reactivated, allowing for about 1 million b/d of crude production to come back online relatively quickly.

• This uncertain supply picture is facing a rapid improvement in global demand on the back of what seems to be the rapid abandonment of Covid19 mandates worldwide, which would allow air travel to rebound strongly over the coming months.

We think the near-term risks are skewed to the upside as demand keeps exceeding supply despite the OPEC ramp up, and Russia supply issues only exacerbate this situation. This would lead to even stronger backwardation until prices start to impact demand enough to balance the market. The current conditions in the oil market are critical and we could see real oil shortages by this summer if the disruptions to Russian oil supplies persist or even worsen.

So it appears that the strong crude oil prices are mainly the result of a very backwardated curve because supply is struggling over the short term. While this adds to the overall inflation pressure coming from generally higher commodity prices, breakeven inflation expectations suggest that the market is expecting these pressures to remain only over the near term. In other words, the market thinks the supply issues will be transitory. However, we think an even bigger and more permanent issue has been brewing in oil markets for years and it is finally filtering through to the back end of the forward curve. Longer dated prices have broken out of their 5-year range and have been moving up relentlessly. We think the oil markets have finally begun to understand that a lack of investments in large oil projects over the past years is threatening supply over the entire next decade, at a time when demand will still be growing as the electrification of the transportation sector will not impact demand meaningfully for years to come. The sharp upward moves in oil prices amidst a broader commodity prices rally have pushed realized inflation and near-term (0-2y) inflation expectations up strongly. But inflation expectations beyond that time horizon have proven to be resilient.

So far the back end of the oil curve moved up only $15/bbl. However, we think that once back end prices are moving in a similar fashion to what we are currently witnessing in the front, longer term inflation expectations will likely begin to move up too.

We will do a deep dive into the strong move at the back end of the oil curve in an upcoming report

Despite rising airline tickets, rental cars, food, and fuel prices, Americans are splurging on hotels as the mantra ‘life is short’ is driving up demand. 

Lodging analytics company STR reports that the average daily hotel rate (ADR) increased to $149.38 last week, the third-highest ever, besides March 19 and the week after Christmas. 

Demand appears to be coming from consumers who are booking on weekends, which has made up for the lack of corporate travelers. 

Jan Freitag, senior vice president at STR, told Bloomberg, “the pandemic has reminded people that life is short.” 

“They want to splurge, and they have a lot of pent-up savings. If a market has a leisure appeal, then the hotels in that market are doing well,” Freitag said. 

All pandemics end eventually, and the latest signs of sustained declines in COVID-19 infections and deaths, and a large percentage of people are estimated to have some form of immunity, are promising signs people want to see before returning to hotels and resorts. 

The CDC recently released a new framework that says most Americans can drop their masks indoors is another belief to some that the pandemic is subsiding. 

CDC Eases Mask Guidelines for Indoor Public Spaces *Including Schools –WSJ

— zerohedge (@zerohedge) February 25, 2022

What will dictate if the pandemic is over isn’t ‘science’ or the government but rather society. This was the same after the 1918 pandemic, when people stopped paying attention and moved on after infections and deaths declined. 

Amber Asher, the CEO of Standard International (parent company of Standard Hotels), said, “We’re not raising rates because of labor costs. “It’s really just demand-driven.” 

Americans appear to be going to big cities and staying at hotels — for whatever reason — if it’s a staycation or vacation, it is a welcoming sign and perhaps a proxy that some in society are ready to take the next giant leap in their lives and move on after losing two years of their lives due to pandemic-related lockdowns enforced by the government.

Being cooped up in a house or condo for two years has reminded everyone that life is short. Get out there and spend, which is the current mood of the consumer, though the 2-year to 10-year spread, the most closely watched part of the yield curve, inverted this week, and sends an ominous sign that the bond market sees economic turmoil ahead. 

So is 2022 the last hurrah for consumers?  

 

Authored by Katabella Roberts via The Epoch Times (emphasis ours),

The Iowa House on March 29 voted to pass a bill that would require public schools in the state to publish their curriculum materials and library books online for parents to view, and give them the power to request that certain books be removed from classrooms.

The House voted 60–36 to pass HF2577, which would introduce a string of changes for both parents and teachers, as well as students and the school districts.

Every Republican member of the House voted in favor of the measure except Rep. Chad Ingels, while all Democrats except Reps. Bruce Hunter and Charlie McConkey voted against it.

The bill comes amid a push from GOP lawmakers in the state to create more transparency and parental involvement in what children are being taught in schools.

It is also a modified version of a previous proposal from Gov. Kim Reynolds that would require schools to publish their curriculum materials and lists of library book titles online.

Specifically, HF2577 would require teachers to give parents access to all “instructional materials”—printed or electronic textbooks and related core materials—that are to be taught in classrooms and allow them to opt out of certain content.

Teachers would need to provide parents with a course syllabus or written summary of the material that will be taught and also explain how the student’s class meets or exceeds the educational standards established in the Iowa Code.

If passed, the policy should be “prominently displayed” on the school’s website and the board of directors should, at least annually, provide a written or electronic copy of the policy to the parents of each student, according to the bill.

If any changes to the materials are made during the school year, the teacher must update the information for the parents to view before the end of the school week in which the changes occurred.

By 2024, teachers will have to use classroom software systems to provide parents with view-only access to the material.

Schools would also be required publish a list of all books that are available in their library and provide parents with a link to access the library and request a book be reviewed or removed, although school years beginning prior to July 1, 2025 that do not have such an electronic library catalog can apply for a waiver.

School districts that violate the rules could face fines of $500 to $5,000 if they do not correct the violations within 14 days.

The nonpartisan Legislative Services Agency estimates the bill would cost Iowa school districts $16.4 million annually to hire classroom cover so that teachers can prepare the materials that need to be reported.

Democrats fear the bill would leave teachers feeling micromanaged and having to spend more time focusing on providing parents with the specific set of information as opposed to spending more time helping children.

“Teachers will be spending all their time trying to enter this information and then reenter what they didn’t do or what they changed,” Democratic Rep. Sharon Sue Steckman said. “[They’ll] be [so] worried about being attacked for what they’re doing that they won’t have any time to show their allegiance to our children.”

However, Republicans have championed the move for creating more transparency among parents and teachers.

“I welcome a change like this that will encourage parents to engage,” said GOP Rep. Garrett Gobble. “Transparency will strengthen trust … and rightfully turn down the temperature and rhetoric surrounding education discussions. I believe this will begin a great new period for parents and teachers to work together for the benefit of our students.”