It's the energy, baby

ProfZero의

INVESTMENT CONTEXT

Inflation in the UK reached 9.1% in May, up a tad from 9.0% reading in April
IEA warned the EU to brace for a potential full cut of energy supply from Russia, with outsized repercussions on the bloc's GDP
Germany’s finance minister called the EU ban on sales of combustion engines cars by 2035 a “wrong decision”
Goldman Sachs upped its latest forecast for probability of a recession over the next two years from 35% to 48%; ARK's CEO Cathie Wood identified in the Fed's excessively tightening monetary policy a cause that could plunge the economy into recession
On June 21, ProShares launched its Short Bitcoin Strategy ETF (BITI), the first inverse exchange-traded fund linked to BTC, which allows investors to bet against the world's largest cryptocurrency by market cap
Crypto exchange FTX extended a USD 250mln credit line to crypto lender BlockFi, shortly after bailing out crypto broker Voyager Digital with a USD 485mln loan

PROFZERO'S TAKE

All Profs timely highlighted the criticality of energy driving the next steps of the ECB monetary policy - other than hopefully accelerating replies from the industrial side, in an effort to ensure greater security and diversification of supply to the continent. Now those warnings are coming to the fore. The Central Bank of Spain estimates a full halt of energy supplies from Russia would plunge EU GDP by between 2.5% and 4.2%; Goldman Sachs locates the crunch at 2.2%, with sizable impacts in Germany (-3.4%) and Italy (-2.6%). Risk management predicates the "build back better" doctrine - when a major crisis strikes, opportunities arise for decision makers to rebuild infrastructures, making them more resilient. Profs really hope this time the EU won't turn a blind eye to the opportunity of pursuing for once a coordinated, integrated, energy strategy
The escalating narrative between U.S. President Biden and the energy sector majors regarding lifting energy output is starting to look paradoxical to ProfZero. According to EIA, U.S. crude oil production was 17.44mboe/d in Q2 2020, at the trough of the pandemic (on April 20, 2020, WTI futures closed on negative territory at USD 37.65/boe below zero); it took 5 quarters for the industry to add 1.5mboe/d, setting production at 18.94mboe/d in Q3 2021, and yet 3 more quarters to add another 1mboe/d (output in Q2 2022 is estimated at 19.94mboe/d). U.S. production broke through 20mboe/d only once in history, on Q4 2019 - at the peak of the previous economic cycle. President Biden demand to hike internal output in a bout to put a lid on retail fuel prices looks therefore hazardous; it would heavily backtrack on the much-touted energy transition off from fossil fuels, while amassing capital investment in a sector that has been demonstrated to require entire quarters before its output may adjust. Even deeper into detail, U.S. refining capacity plummeted from all-time high in - guess when - Q2 2020 at 17.72mboe/d to 15.56mboe/d in Q1 2022, owing exactly to the energy transition kicking older plants off the industry, while leaving higher margins ("crack spreads") to those who stayed. As much as soft commodities, the move off from crude oil into natural gas has been taken for granted for too long. Policy makers were swift to point the finger to the bad guys; but too little was done to build the infrastructures of the energy of the future. A few more refinery runs won't make up for the problem

PROFTHREE'S TAKE

Out of the crude oil frying pan, into natural gas fire - mindful of coal burn. The Netherlands lifted limits on its three coal-fired power plants from 35% to full capacity until 2024; similar measures were undertaken by Austria, Germany and Italy as Russia goes all-out on natural gas curtailments. European Commission President Ursula von der Leyen urged Europe not to "backslide" its long-term commitment to cut fossil fuel usage, and to remain focused on "massive investments in renewables". ProfZero and ProfThree's eyebrows are as high as TTF gas prices - with but 4 months ahead of winter season, and the notorious impossibility for renewable energy to be stored, Profs are in fact fearing a much more worrisome backslide for the EU - one into full energy recession