While the US took a ‘pause’ or a ‘skip’ on interest rates last week, other parts of the world continue to raise interest rates to rein in inflation. Today the Bank of England raised rates by 50 BP and it is expected that in July, Canada and the US will raise rates by 25 BP. There is some good news on the US CPI and PPI fronts as these are slowing, and with the drop off of the high June 2022 data from the next data run, the numbers should come down. Offsetting this is low productivity, a tight labour market and high wage increases. The Fed is concerned about long term inflation because of large wage increases. Recently, the west coast dock workers and the UPS employees got large contract increases.

The Ukrainian counter-offensive has stalled even more over the last week. After only recapturing a few small towns the heavily mined Russian defensive lines are holding. Both sides are expending large amounts of munitions and the winner likely will be the one with the best logistics and supply trains. Ukraine advanced on four fronts to the south and southeast and has gained less than five kilometers of ground according to ongoing reports. Use of much of the new weaponry provided by NATO has helped with this advance but the Russians have destroyed some of the German Leopard tanks and US Bradley fighting vehicles in the recent skirmishes. If this offensive drags on with no large gains for Ukraine on the ground it is likely that NATO will push for a diplomatic solution as they have limited munitions left to aid Ukraine. The US has asked its Asian allies for munitions to backstop US depleted stores. Japan, South Korea and Australia are being tapped. A recent announcement from Australia indicated that the munitions needed by Ukraine are now fully gone from their supplies. Ukraine has fired weaponry at Crimean held facilities and has damaged bridges and military supply depots. This could end badly as Russia could escalate the war with more attacks on western Ukraine. It recently moved tactical nuclear weapons into Belarus which gives Russia the ability to attack northern Ukraine. What is of concern is that Russia could freeze shipping in the Black Sea and this would end Ukraine exporting grain and other important commodities and this would push the prices of these items upward adding to world inflation and food shortages. A blockade of Ukraine’s ports would likely lead to more sanctions against Russia but would lift crude prices upward quickly.

China continues to show the US that it can play offense as well as the US can. China has agreed to build a major military base in Cuba (in addition to the expansion of the major spy base) to base Chinese military personnel and train Cubans. The US is very concerned about this and relations between the two countries are very low despite the recent trip to China by the US Secretary of State Blinken. China’s view is that the US has stationed military personnel in Taiwan, Australia, Guam, South Korea and Japan and that this super power projection of military power should be met by the number two super power (China) to counter US moves. We hope this tension does not escalate but with Taiwan a key objective of Chinese President Xi, any mistake could turn tragic and deadly. If there is a mistake, energy prices could spike as the area around SE Asia is a major transportation route for energy consumers in the region.

We are bullish on the energy sector as we see a new energy super cycle lasting into the end of this decade as we move to add more renewable energy which will require inputs around the world to bring on more key minerals (lithium, cobalt, copper etc.) needed for this evolution. To bring on new production of these items more crude oil and natural gas will be consumed in the countries adding these important inputs to clean-tech. Overall world crude demand could rise from 101 Mb/d this year to 106-108 Mb/d by the end of this decade. OECD countries should see a decline from 46 Mb/d to 42 Mb/d or less but the non-OECD should rise from 55.0 Mb/d currently to over 65 Mb/d. This year alone demand will grow in the non-OECD by 1.5 Mb/d (according to the EIA).

Near term we are concerned that some sluggish economic data (China particularly) and upcoming Q2/23 corporate results (if disappointing in the numbers or guidance) could put downward pressure on stock markets. We suspect a general stock market correction will unfold which will take the Dow down >10% to below 30,000 (now 33,910). A close below 32,600 for the Dow should start the downside pressure for all the indices. This decline could extend into the summer months. One interesting supportive contrarian indicator is that the CNN Fear & Greed Indicator is today at an Extreme Greed level of 79.

Get ready to be buyers on this dip/correction. We are waiting for the next overall stock market to get oversold again to add to our energy investments. Many energy stocks are down over 50% from their 2022 highs. If you want to see what our subscribers are looking at, sign up now for access to the Schachter Energy Research reports at https://bit.ly/2FRrp6k. We expect to add additional ideas during this next decline phase especially if the S&P Energy Bullish Percent Index falls below 5% and triggers a Table Pounding BUY signal.