⛽ Oil’s profit peak

Monday, July 25, 2022 by Robinhood Snacks |
The end of oil’s golden age? (Barry Lewis/InPictures via Getty Images)

The end of oil’s golden age? (Barry Lewis/InPictures via Getty Images)

The end of oil’s golden age? (Barry Lewis/InPictures via Getty Images)

The end of oil’s golden age? (Barry Lewis/InPictures via Getty Images)

Last Week’s Market Moves
Dow Jones
31,899 (+1.95%)
S&P 500
3,962 (+2.55%)
Nasdaq
11,834 (+3.33%)
Bitcoin
$22,756 (+9.26%)

Hey Snackers,

This may be the most morbid DIY project yet: build-your-own-coffin is now a service merchants are offering with Ikea-style kits. “We just had so much fun,” one customer said.

Stocks rallied for the week as investors digested better-than-feared earnings from companies like Netflix and Tesla. But the win streak was snapped on Friday after Twitter posted a loss and Snap reported its slowest quarterly sales growth as a public company. Big Tech earnings are up next.

Pumped

When $6/gallon sounds like a steal... you know the pump anxiety is real. US fuel producers are on track to rake in record cash windfalls. The largest independent oil refiners — Valero, Marathon Petroleum, and Phillips 66 — are poised to collectively make $14B from refining this quarter. Oil biggies like Valero start reporting this week, and the expected profit margins are wild:

  • Exxon, which reports Friday, said its fuel profits could balloon to $4.4B. Compare that to an average profit of less than $860M for the same quarter from 2017 to 2019. Thanks to fuel prices, Exxon forecasts that total earnings could hit $18B — which would be its most profitable quarter in decades.
  • Chevron, which also reports Friday, is expected to have profit nearly triple from the year-ago quarter. In the first quarter, its earnings more than quadrupled.

But oily profit could be peaking... or may’ve already peaked. Summer is usually a busy driving season, but jaw-dropping gas prices are starting to keep Americans off the road. Drivers pumped 10% less fuel in the week ended July 9 compared to last year. Meanwhile, refineries are cranking at full capacity.

  • Less demand + more gas supply = shrinking profits for gas giants. Case in point: gas prices have dropped for 30 days straight.
  • Everything’s relative. Since refining capacity was drastically slashed mid-pandemic, inventories are still relatively low, and prices are still relatively high.
THE TAKEAWAY

A recession could tank gas prices… And if the US isn’t already in one, it likely will be soon. Higher supply and lower demand are already pushing down gas prices — but a recession could tank them. Oil fuels the wheels of economic activity, and suffers when it slows: an economic downturn means less traveling, less spending, and less manufacturing. But for this year at least, refiners are on track for some banner profits.

Zoom Out

Goodbye, my coin… Last year Elon claimed Tesla had “diamond hands” for bitcoin. Turns out Tesla sold 75% of its bitcoin (worth $936M) as of last quarter. On last week's earnings call, Musk said Covid crackdowns in China forced Tesla’s (apparently paper) hand since it needed cash. BTC's price has plunged since Tesla bought $1.5B worth last year, but the company says it sold at a gain. The EV icon stopped accepting bitcoin as payment last year. Its unloading of the OG crypto could signal an end to Musk's days as a crypto hype man.

Asada bowl, extra guac… and a side of organized labor. Last week Chipotle closed a store in Maine after workers filed to form what could’ve been the chain’s first union. Owners cited staffing issues, but workers called it union backlash. It’s not just Chipotle: US labor organizing is rising, and 200 Starbucks have unionized since last fall. This year, Amazon and Apple workers also formed their companies’ first US unions. Union membership has declined for years, but support for unions is near record highs — which could lead to higher costs and more friction for companies.

Events

Less money... still problems. Microsoft, Google, Meta, and Apple are on deck to report this week. With recent layoffs and hiring freezes top of mind, investors expect second-quarter earnings to be tough for some — but not all — of tech’s major players. Analysts predict rougher #'s from Google and Meta as recession fears shrink advertising budgets. Meanwhile, Apple seems to be weathering the economic storm, expecting to report double-digit growth despite supply snags. Investors are optimistic about Microsoft's booming cloud biz.

Power to the Powell… To tame prices, the Fed hiked interest rates by an unexpectedly high 0.75 percentage point last month — the biggest jump since the ’90s. On Wednesday, America’s central bank is expected to dish out another three-quarter-point hike. Some analysts say it should be more aggressive and raise rates by a full point. Last week, Europe’s central bank hiked rates for the first time in 11 years (’flation’s even worse there). But moving too fast could trigger (or deepen) a recession by slowing spending, investment, and hiring.

ICYMI
  • Doc: Amazon agreed to buy swanky healthcare provider One Medical for nearly $4B, its third-largest deal after Whole Foods ($14B) and MGM ($9B). It’s trying to Prime-ify the convoluted healthcare biz.
  • Tab: After a decade as a mobile-only app, Snap launched a desktop version to tap into the “side-tab economy” (think: shopping and scrolling mid-Zoom call). That could help it compete with TikTok and Insta.
  • Fazed: Viral gaming brand FaZe Clan went public through a $725M SPAC merger. It’s a milestone for the creator economy, but FaZe’s 500M-strong following may not protect it against the SPAC-pocalypse.

What else we’re Snackin’

  • Check: Many hate self-checkout (“please place item in the bagging area”), but it’s a massive cost-saver for retailers. Now, Walmart, Kroger, and Dollar General are piloting self-checkout-only stores.
  • Gulp: The bond-market yield curve has inverted, signaling markets are more optimistic about short-term investments than long-term ones. The inversion has preceded every US recession for decades.
  • Mine: Cryptomining is raising electrical bills for consumers and businesses. A congressional investigation found that the largest US bitcoin-mining companies use nearly as much electricity as all the homes in Houston.

Snack Fact of the Day

Humans’ ability to smell geosmin (the scent of wet earth after rain) is more powerful than sharks’ ability to smell blood in water

This Week

  • Monday: Earnings expected from Ryanair and Logitech
  • Tuesday: Earnings expected from Microsoft, Google, Visa, Coke, McDonald’s, UPS, Mondelez, GE, Raytheon, and 3M
  • Wednesday: Fed’s interest-rate decision. Earnings expected from Meta, Shopify, Spotify, Boeing, Qualcomm, Ford, Sherwin-Williams, Cheesecake Factory, and Deutsche Bank
  • Thursday: Jobless claims. Earnings expected from Apple, Pfizer, Merck, Comcast, Intel, Altria, Valero, Stellantis, Wingstop, Southwest, and Sirius XM
  • Friday: Earnings expected from Exxon, Chevron, Procter & Gamble, and Caterpillar

Authors of this Snacks own: bitcoin and shares of Google, Amazon, Starbucks, Spotify, Ford, Apple, Microsoft, Snap, Tesla, Netflix, Twitter, Exxon, Sirius XM, Shopify, Comcast, and Walmart

ID: 2309870