Gasoline Prices Are Falling, but at What Cost?

Gasoline consumers around the world, from families to businesses, have had to deal with record prices at the pump for months as global demand has surged past the rate of new supply.

Some relief now appears to be on the way, mostly due to recession fears, which I’ll get into later. In the U.S., the average price for a gallon of gas has fallen about $0.26 since its all-time high of $5.02, set on June 14. Meanwhile, the price of Brent crude, the European benchmark, has plunged below its 50-day moving average and is now trading at levels last seen in April.

Oil Price Has Fallen Below Key Moving Average on Recession Fears

With midterm elections coming up, President Joe Biden has been under pressure to do something about crushing fuel costs, but in reality, the executive branch can do very little to bring prices down. Unlike many others, I don’t believe the president’s actions have gotten us here, nor can they do much to ameliorate the situation.

At the same time, Biden’s attempt to place full blame at the feet of Vladimir Putin strikes me as insincere and smells of desperation. Federal Reserve Chair Jerome Powell said it himself that prices were rising well before Russia invaded Ukraine.

Selling Gasoline Is a Low-Margin Business

I was also shocked to see Biden’s recent tweet insinuating that gas station owners were responsible for gouging prices. “Bring down the price you are charging at the pump to reflect the cost you’re paying for the product. And do it now,” he said.

This is a gross misunderstanding of how fuel is priced in the U.S., and who profits from it. In this country, most convenience stores and gas stations are mom-and-pop operations. Only 0.1% of them are estimated to be owned by a major oil company, according to the National Association for Convenience Stores (NACS).

The truth is that selling gas just isn’t very profitable. Margins are razor-thin, even while big oil companies are raking in record profits. An investigation by The Hustle’s Zachary Crockett found that, based on $4.09 gas, station owners pocket only between $0.03 and $0.07 for every gallon that leaves the pump.

The real money is found in selling Snickers bars and slushies.

Where Your Money Goes When You Buy a Gallon of Gas

So, with all due respect to the president, there’s really no way for convenience store operators to lower the price of gas, as they’re already virtually giving it away at cost.

U.S. Is Likely in a Recession

Again, the reason for lower fuel prices is that traders are forecasting muted demand on a possible recession, making the relief a Pyrrhic victory. As I briefly mentioned last week, the U.S. is believed to have entered a recession as of the June quarter, based on the Atlanta Fed’s GDPNow model.

Economists define a recession as a period when real gross domestic product (GDP) contracts for two or more consecutive quarters.

U.S. Economy May ALready Be in a Recession

It’s not just oil and gasoline that are signaling an economic pullback. Many commodities that were flying high earlier this year have now either plateaued or rolled over completely. On Friday, lumber futures were trading at around $665 per 1,000 board feet, down more than 50% from their 2022 high of $1,477.

The price of copper, an important economic bellwether, has slipped below $8,000 per ton and is now at a nearly two-year low.

European Farmers Protesting Unrealistic Climate Policies

It’s crucial we remember why fuel prices were scorching hot in the first place. Poorly conceived and executed climate policies are, as I’ve said many times before, largely at fault and will continue to be so.

More than anywhere else on earth right now, Europe is paying a heavy toll for the draconian rules that have been forced upon families and businesses by unelected bureaucrats. Fortunately, some are fighting back.

In demonstrations that recall to mind the Canadian trucker protests earlier this year, farmers in the Netherlands are protesting proposed regulations that would reduce the amount of fertilizer they can use as well as the number of livestock they can raise. These protests have reportedly spilled over into other parts of Europe, including Italy, Poland and Germany.

In the short-term, the conflict in Ukraine has only exasperated conditions in Europe, which could be facing a serious energy shortage, especially later this year.

As a result, we’re seeing alarming examples of European governments planning to nationalize their countries’ energy sectors. France is set to take full control of Électricité de France, or EDF, the world’s largest electricity producer as recently as 2009. Germany may end up taking a stake in Uniper, a Düsseldorf-based power producer that operates in more than 40 countries.

Reading this should make one feel proud to live in the U.S. We’re not without our own challenges when it comes to energy, but the country remains the world’s leading producer of oil, and there’s very little risk of the government assuming control of private companies.

Read an outsider’s analysis of GROW stock by clicking here.

Review HIVE Blockchain Technologies’ Bitcoin and Ethereum production report for June by clicking here.

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 0.78%. The S&P 500 Stock Index rose 2.06%, while the Nasdaq Composite rose 4.56%. The Russell 2000 small capitalization index gained 2.43% this week.
  • The Hang Seng Composite fell 0.54% this week; while Taiwan was down 20.61% and the KOSPI fell 21.06%.
  • The 10-year Treasury bond yield rose 20 basis points to 3.084%.

…………………

Emerging Markets

Strengths

  • The best performing country in emerging Europe for the week was Poland, gaining 2.2%. The best performing country in Asia this week was India, gaining 2.5%.
  • The Czech koruna was the best relative-performing currency in emerging Europe this week, losing 2.0%. The South Korean won, was the best performing currency in Asia this week, gaining 0.25%.
  • Caixin China PMIs surprised to the upside in June, all crossing above the 50 mark that separates growth from contraction. Manufacturing PMI was reported at 51.7, Service PMI at 54.5, and Composite PMI at 55.3, levels last seen at the end of 2020.
Chinese Caixin PMIs Improved in June

Weaknesses

  • The worst performing country in emerging Europe for the week was Romania, losing 1.0%. The worst performing country in Asia this week was Malaysia, losing 2.0%.
  • The Russian ruble was the worst performing currency in emerging Europe this week, losing 14.1%. The Pakistani rupee, was the worst performing currency in Asia this week, losing 1.4%.
  • Annual inflation in Turkey for the month of June was reported at 78.62%, beating the highest level in 24 years. Core inflation reached 57.26%. Turkey’s producer price index (PPI) increased by 138.31% on an annual basis, the Turkish Statistical Institute said on Monday.

Opportunities

  • China is preparing to provide more stimulus. Bloomberg reports that the Asian nation’s ministry of finance is considering allowing local governments to sell CNY1.5T ($220 billion) in special bonds in the second half of the year as it attempts to accelerate infrastructure spending. In addition, the government may provide more tax breaks for buyers of electric vehicles.
  • Alibaba shares in the U.S. are extending June’s 18% gain, the biggest since January 2019, even as American tech valuations continue to be depressed by Federal Reserve interest rate increases. Speculation that a crackdown on the tech sector may be drawing to a close is buoying bets on Alibaba, which has plenty of cash and looks cheap relative to its peers by some metrics, Bloomberg reports.
  • Hong Kong has eased its travel curbs. Local authorities on Thursday suspended a system banning airline routes, which brought infected passengers into the city. The policy stated that if at least five passengers flying into Hong Jong tested positive for Covid-19 (or 5% of travelers, whichever is higher), a five-day flight ban would be implemented. This has led to many airlines staying away and to at least 100 flights being banned so far this year.

Threats

  • The Eurozone ZEW Survey, that measures the direction of the economy over the next six months, may be reported weaker than anticipated next week. This comes on the back of this week’s weaker reading of the Sentix Investor Confidence Index. The ZEW data will be released on July 14.
  • The flow of gas from Russia to Europe will be interrupted from July 11 to July 21, due to maintenance of the North Stream 1 pipeline. However, some observers speculate that Russia may use this as an opportunity to shut the flow of gas into the Eurozone for good. The price of gas spiked again. The European Union imports 40% of its gas from Russia and is working to diversify its gas suppliers.
  • Hungary’s central bank delivered an unexpected 200-point hike to stop the sharp depreciation in the Hungarian forint. The forint dropped more than 2% against the euro on Wednesday as investors sold riskier assets amid growing concern that tighter monetary policy may tip parts of the world economy into a recession. The dollar has spiked to a level last seen in 2002, pushing emerging market currencies lower. Due to a hawkish Federal Reserve, this trend may continue. The Turkish lira is the worst performing global currency currently, down 21.5% year-to-date against the U.S. dollar.

Energy & Natural Resources

Strengths

  • The best performing commodity for the week was wheat, up 5.59%, posting its first weekly advance in a month. Ivanhoe Mines Co-Chairs Robert Friedland and Yufeng Sun announced in a press release this week that the Kamoa-Kakula Mining Complex in the Democratic Republic of Congo has set a new quarterly production record in the second quarter of 2022. Kamoa-Kakula produced 87,314 tonnes of copper in concentrate in the quarter. Kamoa Copper milled approximately 1.95 million ore tonnes during the second quarter, at an average feed grade of 5.44% copper.
  • Global upstream spending could increase by 22% in 2022. The war in Ukraine has accelerated the recovery, with operators pulling forward spending plans for a realigned global energy order. North American spending growth of 33% is led by privates and independents growing capex by 56% and 42%, respectively, while international growth of 18% is led by the Middle East, Asia, and Latin America.
  • Shell Plc has decided to proceed with building Europe’s largest plant producing hydrogen from renewable power, reports Bloomberg, as oil majors bet the fuel could be key to cutting carbon emissions. A statement from Shell on Wednesday noted that Holland Hydrogen I will include 200 megawatts of electrolyzers, powered by a wind farm off the coast of the Netherlands.

Weaknesses

  • The worst performing commodity for the week was crude palm oil, down 11.70%. The Food and Agriculture Organization of the UN reported global food prices fell for a third consecutive month, led by vegetable oil, cereals, and sugar, while dairy and meat rose. Oil demand destruction has now become more visible in certain pockets of the product slate. While global air traffic is recovering, it is lagging in non-OECD countries. There are clear headwinds to diesel demand from slowing manufacturing and trade activity. U.S. gasoline demand continues to consistently lag 2021 levels despite the post-Covid reopening.
  • According to JPMorgan, with 16% of global oil capacity under sanctions, there is no cheap way to keep Russian barrels out of the market. At the onset of the Russian/Ukraine war, many oil market analysts and traders assumed that the impact of sanctions would increase over time. Russia initially struggled to find a replacement for Western consumers of its oil products and has had to shut in refining capacity. However, Russian crude oil has not only found new buyers, but waterborne flows of Russian crude are higher than they were before the Ukraine crisis.
  • Copper fell to the lowest level in 17 months, with metals extending losses as global recession fears continue to dampen the demand outlook for commodities. Sentiment remains sour for industrial materials used in everything from construction to new energy vehicles. Copper, widely considered an economic bellwether, is trading solidly below $8,000 a ton, after metals posted their worst quarterly slump since the 2008 financial crisis.
Copper Prices Are Sinking

Opportunities

  • According to Baker Hughes, the total U.S. rig count was up 13 rigs last week with the oil rig count up 10 rigs and the gas rig count up three rigs. The U.S. Frac Spread Count was up five this week to 289, up for the third consecutive week. In the oil basins, ENLC marked the largest increase in rig count this week, up 15% to 38 rigs.
  • Chile’s copper output rebounded to 480 thousand tons (kt) in May, up from 420 kt in April and the highest monthly output level seen since December 2021. The mine-by-mine breakdown is not yet available, but this brings year-to-date output to a 6.1% decline.
  • According to JPMorgan, energy stocks offer the most attractive risk/reward opportunity within equities, especially after the recent sharp correction in the S&P 500 Energy and Small-Cap Energy indices. Energy is a deep value sector that is simultaneously improving on quality, growth, and income factors, according to the bank. The sector should deliver strong relative growth (with upside to current consensus estimates) and rising capital return at very cheap valuation.

Threats

  • Zinc has material exposure to a slowdown/recession in Europe and the U.S. Deteriorating demand and a shift to China becoming a net zinc exporter to alleviate current tightness, could result in further price consolidation in the second half of 2022. Zinc has significant exposure to an expected slowdown in ROW construction activity versus muted construction recovery in China; constraints on discretionary spend are set to negatively impact white goods, and a sharp recovery in demand from the automobile sector may not happen.
  • Currently, 5.5 million b/d of refining capacity is due to close over the 2019-2023 period. In addition, 2.2 mb/d of refinery nameplate capacity is functionally irrelevant, primarily in Venezuela, Mexico, and Nigeria. Lastly, 1mb/d of refining capacity in Russia and China remains offline, with no obvious catalyst nor incentive to restart. With oil demand normalized outside of China, refining run rates in swing refining regions are pushing to new all-time highs. 
  • The Chilean government announced on July 1 a new tax reform proposal, consisting of four bills. The bills raise taxes on the wealthiest 3% and increase copper mining royalties on companies that produce over 50,000 tons of copper per year. Copper mining companies that produce between 50,000 – 200,000 tons per year of fine copper will face an ad valorem tax between 1-2%. Those producing over 200,000 tons per year will face a rate between 1-4%.

……………………

Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Swirge SWG, rising 3,775.59%.
  • Facebook parent company Meta is to proceed with its plans to bring digital collectibles to its users, reports CoinDesk, undeterred by the recent sharp downturn in the cryptocurrency market. 
  • Planetarium Labs, a Singapore-based web3 gaming technology firm, has raised $32 million in Series A funding led by Animoca Brands. Other investors in the round include Krust Universe, Korean technology giant Kakao’s investment arm, reports Bloomberg.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Nody NODY, down 96.87%.
  • Crypto brokerage Voyager Digital has filed for chapter 11 bankruptcy protection, reports CNBC, becoming the latest casualty of chaos in digital asset markets. Voyager commenced bankruptcy proceedings in the U.S bankruptcy court for the southern districts of New York on Tuesday.
  • The recent buildup in open interest for Bitcoin futures is eerily similar to that seen just before the contract began a long descent from late 2021, writes Bloomberg. This suggests the recent consolidation around the $20,000 mark could be merely a pause before another leg south.
Bitcoin Futures Show Repeat Open Interest Build Up

Opportunities

  • Bitcoin coasted over the $20,000 mark on Wednesday morning even as recession fears linger among investors and an institutional product to short the asset gained traction last week. Bitcoin rose 2% in the past 24 hours, reports Bloomberg, continuing a gradual recovery after last month’s sudden drop to the $17,700 level.
  • Sorare is one of several companies attempting to take the idea of collectibles like baseball cards and bring them into the digital context. In May, Sorare announced a partnership with Major League Baseball in the U.S. as well as putting Serena Williams on the Board, writes Bloomberg. 
  • Crypto exchange Bitstamp cancelled a planned “inactivity fee,” reversing course just five days after announcing the charges. The Luxembourg-based company scuttled a plan to start charging non-U.S. users 10 euros a month on accounts that haven’t traded, deposited, withdrawn or staked assets for a year with a total balance of less than 200 euros, according to Bloomberg.

Threats

  • Account holders at now-bankrupt Voyager Digital shouldn’t expect to get all their crypto back as the company reorganizes. The company’s plan to exit bankruptcy plainly states that it expects account holders to be “impaired” by the Chapter 11 process, meaning they won’t be getting back exactly what they’re owed, writes Bloomberg. 
  • Luxury British jeweler Graff Diamonds paid $7.5 million ransom in Bitcoin to a Russian hacking gang after it leaked data on the jeweler’s high-profile clients. Graff, that counts Middle East royalty among its client base, sued its insurer for losses over the extortion, saying that the payment should be covered under their policy, writes Bloomberg. 
  • Investors in the world’s biggest cryptocurrency are going into hibernation mode with on-chain activity dropping by 13% in early July from November’s highs, levels last seen in the bear phases of 2018 and 2019 (when Bitcoin was worth less than $10,000), according to Glassnode analysis. The risk-off market mood is spreading to the cryptocurrency exchanges as investors withdraw and stow their coins off-line in crypto wallets instead.

Gold Market

This week gold futures closed at $1,740.40, down $61.10 per ounce, or 3.39%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 3.29%. The S&P/TSX Venture Index came in off just 0.30%. The U.S. Trade-Weighted Dollar rose 1.74%.

Date Event Survey Actual Prior
Jul-5 Durable Goods Orders 0.7% 0.8% 0.7%
Jul-7 Initial Jobless Claims 230k 235k 231k
Jul-8 Change in Nonfarm Payrolls 265k 372k 384k
Jul-12 Germany ZEW Survey Expectations -40.0 -28.0
Jul-12 Germany ZEW Survey Current Situation -34.5 -27.6
Jul-13 Germany CPI YoY 7.6% 7.6%
Jul-13 CPI YoY 8.8% 8.6%
Jul-14 PPI Final Demand YoY 10.4% 10.8%
Jul-14 Initial Jobless Claims 235k 235k
Jul-14 China Retail Sales YoY 0.4% -6.7%

Strengths

  • The best performing precious metal for the week was palladium, up 11.01%, perhaps on new tightness in the market with the Stillwater Mine remaining offline for at least several more weeks. In May, central banks reported adding a net 35 tons to global gold reserves. This is the second consecutive month of net buying, reports the World Gold Council, having recently oscillated between monthly net purchases and sales.
  • Petra Diamonds announced its final tender for the 2022 fiscal year (June year-end). The tender was $93 million, bringing fiscal year sales to $585 million, a 44% increase year-over-year. The positive surprise is driven primarily by realizations, although volumes (carats) were a little higher as well.
  • Sandstorm Gold reported preliminary results for the second-quarter sales this week. The company sold 19,200 gold equivalent ounces, compared to 18,004 in the prior year’s second quarter. In addition, total revenues came in at $36 million, a record for the company, and is comprised of sales, royalties, and other income.

Weaknesses

  • The worst performing precious metal for the week was gold, down 3.39%. Gold edged lower as the dollar strengthened, reports Bloomberg, on bets the deteriorating growth outlook for the euro area will lead to slower monetary tightening there than in the U.S. The greenback gained as much as 0.7% — putting pressure on gold — as the euro dropped amid weaker economic data in France. Concerns are growing about gas shortages because of cuts to supplies from Russia, with the fallout likely to restrain rate increases by the European Central Bank, the article continues.
Gold Trades Near Six-Month Low as Dollar Strengthens
  • Exchange-traded funds (ETFs) cut 25,717 troy ounces of gold from their holdings in the last trading session, bringing this year’s net purchases to 6.17 million ounces, according to data compiled by Bloomberg. This was the fourth straight day of declines. The sales were equivalent to $46.5 million at the previous spot price. Total gold held by ETFs rose 6.3% this year to 104 million ounces, the lowest level since March 17.
  • Hecla Mining has entered into an agreement with Wheaton Precious Metals Corporation to terminate its existing silver stream on Alexco Resources’ Keno Hill Silver property for $135 million, reports Zacks. Wheaton will have a 5.6% shareholding interest in Hecla’s shares after the Keno Hill silver stream deal ends.

Opportunities

  • Hecla Mining and Alexco Resource Corp. announces a definitive agreement for Hecla to acquire all the outstanding common shares of Alexco that Hecla does not already own. Each outstanding common share of Alexco will be exchanged for 0.116 of a share of Hecla common stock implying consideration of $0.47 per Alexco common share and a premium of 23% based on the companies’ five-day volume weighted average price on the NYSE and NYSE American on July 1, 2022.
  • According to Stifel, gold and silver have historically outperformed through the summer months, beating the S&P 500 by 1.9% and 4%, respectively on average, over the last 25 years. Stifel believes this dynamic will hold through 2022 as investors look to preserve wealth after the recent dramatic contraction in the broader equity market. Lending further support for the case for gold, a recent Bloomberg study covering the last 50 years and seven recessions, showed bullion outperformed the S&P 500 by about 50% on average in a two-year period (that included 12 months before and after the start of U.S. recessions).
  • Leaders of the Economic Community of West African States (ECOWAS) on Sunday lifted economic and financial sanctions imposed on Mail, reports Reuters, after its miliary rulers proposed a 24-month transition to democracy and published a new electoral law. While gold mining activities in the country were largely unaffected by the sanctions, we believe that the removal of sanctions and the agreed election timelines should improve investor sentiment toward Mali. Producing gold mining companies in Mali include B2Gold, Barrick, Resolute Mining, and Hummingbird Resources. ECOWAS is a regional political and economic union of 15 countries located in West Africa.

Threats

  • According to RBC, Argonaut Gold announced a capex update at Magino and associated financing as a tough but necessary measure to recapitalize the company in getting construction to the finish line. The current share price and depressed valuation reflect the market’s low level of confidence given successive budget overruns, which may be sustained until the project has greater visibility to completion in early-2023. 
  • Newmont Corp. announced an incremental 10% profit-sharing payment to the workforce at its Penasquito mine in Mexico (17% of EBITDA, 14% of NAV) that amounts to a 1-2% negative impact to both NAV and market cap.
  • Emerging market bonds face a $237 billion cascade of defaults, reports Bloomberg, with Sri Lanka already stopping its payment to bond holders this year. Russia stopped in June. Now, El Salvador, Ghana, Egypt, Tunisia, and Pakistan are cited as particularly vulnerable. As history shows, the collapse of one government can create a domino effect with their traders pulling money from shaky markets. Ghana is of particular interest as it is Africa’s second-biggest cocoa and gold producer. Currently, Ghana is seeking financial assistance from the IMF for access of up to $1.5 billion to shore up its finances and win back access to the global capital markets.

Author: Frank Holmes

Read the full article at https://www.usfunds.com/resource/gasoline-prices-are-falling-but-at-what-cost/