Morning Reads








Crude reality

A price cap on Russian seaborne oil came into force on Monday as the West attempts to curb revenue flows to Moscow's war machine. After intense negotiations, G7 nations and Australia agreed to a $60 per barrel price level, with an adjustment mechanism that keeps the cap at least 5% below the market rate and allows for revisions every two months. Crude remains Russia's economic lifeblood, especially after the country put a stop to natural gas sales to Europe (a move that was first attributed to maintenance problems and later to sanctions).

How it works: The deal allows Russian oil to be shipped to third-party countries using G7 and EU tankers, only if the cargo is bought at or below the $60 per barrel cap. The level is seen as high enough to cover production costs and encourage more output, though Ukraine's Volodymyr Zelenskyy slammed the agreement, calling it "quite comfortable for the budget of a terrorist state." G7 insurance companies, credit institutions and transport services will also have to observe the price ceiling, which is important as 95% of the world's oil tanker fleet is covered by the International Group of P&I Clubs in London and companies based in continental Europe.

While the industry is still awaiting a complete response from Russia, the Kremlin has said it will redirect its oil supply to "market-oriented partners" even if that means it will have to cut production. A presidential decree would also prohibit loadings destined for any countries that adopt the restrictions, and ban any reference to a price cap in contracts for Russian crude or oil products. "We are working on mechanisms to prohibit the use of a price cap instrument, regardless of what level is set, because such interference could further destabilize the market," said Russian Deputy Prime Minister Alexander Novak.

Outlook: Russia is the world's second-largest oil exporter, meaning how the situation plays out could influence prices in the months ahead. Many analysts still say that Russia has enough of a shadow fleet to skirt the sanctions, meaning more shipments will be rerouted, which is already happening across global crude markets. While that could keep oil prices at current levels, or even depress them based on demand factors, others are more fearful about the future, saying that a drop in Russian sales or output could lead to a surge in crude and gasoline prices worldwide. (19 comments)

OPEC+ unchanged

The direction of crude oil is growing even more uncertain after OPEC+ decided on Sunday to keep its oil production target unchanged at its latest meeting. The group said there were just too many unknowns to tinker with policy at the moment, such as the G7 oil price cap, recession worries and China easing its zero-COVID policy that has battered its fuel demand. China's Xi Jinping will also head to Saudi Arabia this Thursday to meet Saudi Crown Prince Mohammed bin Salman, which could be another pivotal moment for global energy markets (the two economies represent the world's biggest oil importer and exporter).

Market movement: WTI crude oil futures (CL1:COM) have declined 12% over the past month, and are down 30% over the last six months, but have risen 5% over the past week - and a total of 7% YTD - to around $80 per barrel.

OPEC already slashed production by 2M barrels per day in early October, and while crude briefly topped $90 per barrel as a knee-jerk reaction, it retreated to as low as $73 just a week ago. The output cut was a blow to White House-led efforts to boost production, with the Biden administration confirming it would release additional output from Strategic Petroleum Reserve as needed and then replenish the reserve. Oil volatility is likely to continue in the sessions to come, given the unpredictability of supply and demand.

Go deeper: The next official meeting of OPEC+ is in June, but a gathering of the group's Joint Monitoring Committee - led by Saudi Arabia and Russia - will meet in February, and can call a ministerial production meeting if there are any major shifts in the market. (84 comments)

Survey Monday

With oil trading back at $80, and many new developments taking place in crude markets, what next price level is U.S. West Texas Intermediate likely to hit first?

· $70 (macro headwinds are deteriorating the outlook)
· $90 (fundamentals are strong and improving)

Take the survey and see the results here


While China continues to loosen its COVID restrictions, one company is growing nervous about how reliant it has become on the world's second-largest economy. The country has been a key piece of how Apple (NASDAQ:AAPL) transformed into becoming the world's most valuable company, with a supply chain and outsourcing strategy that has been in place since the late 1990s. The tech giant is now looking elsewhere in Asia, like India and Vietnam, but challenges await and the task won't be easy.

Backdrop: Turmoil at Apple supplier Foxconn's (OTCPK:FXCOF) iPhone factory in the city of Zhengzhou drew attention last month as videos of worker riots were shared on social media. It's unclear how many of the 300,000 employees at "iPhone City" were involved, but Apple has flagged "lower iPhone 14 Pro and iPhone 14 Pro Max shipments" due to prior curbs at the complex, which includes dormitory accommodations and is responsible for around 80% of global iPhone output. Besides iPhone assembly, many Apple components are made in China, with some estimating that 95% of total iPhone supply still comes from the country.

"In the past, people didn't pay attention to concentration risks," noted Alan Yeung, former U.S. Director of Strategic Initiatives at Foxconn. "Free trade was the norm and things were very predictable. Now we've entered a new world."

Fun fact: Operating profit for Apple's China business totaled $31B last year, which was more than the figures for each of China's largest tech giants - Alibaba (BABA), Baidu (BIDU), Tencent (OTCPK:TCEHY) and Xiaomi (OTCPK:XIACY).

Trade dispute

Green tensions are spilling into the open ahead of a U.S.-EU ministerial meeting today of the Trade and Technology Council. The bloc claims that the Americans aren't creating a level playing field, with much of the $370B Inflation Reduction Act going towards clean technology. The green energy subsidies and tax breaks are aimed at boosting domestic production for U.S. companies as the government plows billions into businesses involved in electric vehicle technology and the energy transition.

Quote: "The new assertive industrial policy of our competitors requires a structural answer," declared Ursula von der Leyen, the president of the European Commission. "There is a risk that the Inflation Reduction Act could lead to unfair competition, could close markets and fragment critical supply chains. We must take action to rebalance the playing field... to improve our state aid frameworks. In other words: We need to do our homework in Europe and at the same time work with the U.S. to mitigate competitive disadvantages."

Things are looking even more intense after the head of the European Parliament's trade committee said that elements of Inflation Reduction Act would mean that the EU needs to file a complaint at the World Trade Organization. It's not only about luring investors away from Europe, but also shutting out European companies that could benefit from the tax breaks and subsidies that are only available for U.S.-based businesses. Some even think that things could quickly morph into a trade war if things cannot be settled diplomatically.

More assertive policies: "We are very careful to avoid distortions in our single market, but we must also be responsive to the increasing global competition on clean tech," von der Leyen continued. "If we see that investments in strategic sectors are leaking away from the EU, this would only undermine the single market. That is why we are now reflecting on how to simplify and adapt our state aid rules."

Today's Markets

In Asia, Japan +1.8%. Hong Kong +4.5%. China +1.8%. India -0.1%.
In Europe, at midday, London +0.3%. Paris -0.4%. Frankfurt -0.5%.
Futures at 6:30, Dow -0.4%. S&P -0.4%. Nasdaq -0.2%. Crude +1.4% to $80.92. Gold flat at $1808.90. Bitcoin +2% to $17,306.
Ten-year Treasury Yield +1 bps to 3.51%

Today's Economic Calendar

9:45 PMI Composite Final
10:00 Factory Orders
10:00 ISM Service Index
12:30 PM Investor Movement Index

Companies reporting earnings today »

What else is happening...

Space industry in focus amid NASA's Artemis I return flyby of the Moon.

Vandalism leaves many Duke Energy (DUK) customers without power.

Post-FTX: JPMorgan still sees a need for centralized crypto exchanges.

Vodafone (VOD) CEO Nick Read to step down at the end of 2022.

Elon Musk says Apple (AAPL) has 'fully resumed' advertising on Twitter.

Tesla (TSLA) to cut Shanghai production amid slow demand - Bloomberg.

Florida working to let Disney (DIS) avoid 'Don't Say Gay' fallout - FT.

FTC rift may provide path for $69B Microsoft (MSFT)-Activision (ATVIdeal.

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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