Balancing act

How will higher oil prices factor into the economy and can they be sustained? Those are some of the questions traders are now asking as they look to position their portfolios for the rest of 2023 and beyond. Remaining below $80 per barrel for most of the year, WTI crude futures (CL1:COM) broke above that price level in the summer, and jumped to as high as $88/bbl on Tuesday (Brent traded above $90) after Saudi Arabia and Russia said they would extend their voluntary production cuts through the end of the year.

Inflation risk: Many had thought the OPEC+ leaders would lengthen their cuts into October, but the three-month extension came as a surprise. Equities also saw some knee-jerk losses, with the likelihood of higher prices leading to more monetary tightening. The latest cuts by the Saudis (1M barrels per day) and Russians (300K bpd) are on top of the April cut agreed by several OPEC+ producers (1.66M bpd) – which extends to the end of 2024 – while both countries stated they could even consider deepening their cuts further depending on market conditions.

Following the announcement, U.S. National Security Advisor Jake Sullivan said that President Biden is “doing everything within his toolkit to be able to get lower prices for consumers at the gas pump.” The national average price of a gallon of regular gasoline now stands at $3.811 a gallon, according to data from AAA, marking the highest seasonal level since 2012. Higher energy costs could also dent hopes and forecasts for a “soft landing,” which has gained renewed momentum following a recent spate of economic data (see below).

What to watch: Expensive energy could curtail growth across the globe, especially in China, whose economy is under pressure due to the nation’s stop-and-go pandemic rebound, property troubles and debt problems. The Saudis and Russians need to be careful about this, and pull off somewhat of a balancing act, because if things get worse for China as oil prices stay high, their recent cuts may end up backfiring and reduce demand for the commodity. Interestingly, the G7 – along with the EU and Australia – also appear to have deferred regular reviews on their $60 Russian oil price cap scheme despite Urals-grade crude trading at $74/bbl on average in August.

Data dependent

Federal Reserve Governor Christopher Waller said last week’s strong economic data will buy the central bank some time as it mulls whether further interest rate hikes are needed. “That was a hell of a good week of data we got last week, and it’s going to allow us to proceed carefully,” he said, referring to the nonfarm payrolls report, PCE inflation data and the JOLTS report. While the progress so far has been encouraging, Waller said the Fed can afford to keep rates higher for longer and it is key to “see whether this low inflation is a trend or if just an outlier.” Markets are widely expecting the Fed to maintain rates this month, although there is uncertainty over its rate path in the meetings thereafter. (1 comment)

Arm and a leg?

British chip design firm Arm Holdings (ARM) has updated its IPO filing, saying it expects to price 95.5M shares between $47 and $51 apiece. That would value the company at as much as $54B, which is lower than the $64B valuation at which SoftBank (OTCPK:SFTBY) had previously bought a 25% stake it didn’t already own in Arm. The chip designer also confirmed that several major tech companies – including Apple (AAPL), Google (GOOG, GOOGL) and Nvidia (NVDA) – will become investors in the offering. While the hype surrounding Arm has been growing, Wall Street analysts have warned that this may not be warranted. Investing Group Leader Jonathan Weber also raised concerns over Arm’s high valuation, even if its underlying business growth is attractive. (27 comments)

Energy mix

Enbridge (ENB) fell 7% in extended trading on Tuesday after announcing three deals with Dominion Energy (D). It will buy East Ohio Gas Co., Questar Gas and Public Service Company of North Carolina for a combined value of $14B, creating the biggest natural gas utility in North America. Enbridge also announced a C$4B equity issuance, a portion of which will be used for acquiring the utilities. The deal comes 10 months after Dominion said it would review its business to improve results. Moody’s revised its outlook on Enbridge to negative from stable, saying the deals would add pressure to the company’s already weak financial profile. (113 comments)