Tomorrow, the 32 countries that are members of the International Energy Agency (IEA) will vote on an IEA proposal to tap their strategic petroleum reserves to bring down oil prices, which have been boosted by the latest war in the Middle East. The release would exceed the oil that IEA countries released after Russia invaded Ukraine in 2022. The IEA members hold 1.8 billion barrels in reserves, which include 600 million barrels in commercial inventories. That would offset about 124 days' supply trapped on the wrong side of the Strait of Hormuz.
This news came out this evening and had no impact on Brent and WTI crude oil prices because it was expected after the G7 Finance Ministers and Central Bank Governors held an emergency virtual meeting yesterday. They issued a joint communiqué stating they "stand ready to take necessary measures," specifically mentioning a coordinated release of strategic petroleum reserves. Reports suggest the group is weighing a release of 300 million to 400 million barrels—a move that would dwarf the 240-million-barrel release following the 2022 invasion of Ukraine.
Earlier today, oil prices dropped on news that Secretary of Energy Chris Wright claimed in a social media post that the US Navy had successfully escorted a tanker through the Strait of Hormuz. The White House quickly said that Wright was wrong, causing the stock market's rally to fade this afternoon. Both the S&P 500 market-weight and equal-weight indexes remain just above their 200-day moving averages during the current pullback (chart). That's impressive under the circumstances.
The stock market should react positively tomorrow morning to the IEA news and to Oracle's better-than-expected results after the close. The company's stock surged in after-hours trading on a 22% y/y increase in revenue led by a 44% jump in cloud revenues, and a 21% gain in earnings. Most remarkable is the 325% jump in remaining performance obligations (RPOs). Management attributed this almost entirely to large-scale AI contracts. Could it be that AI isn't a bubble after all? That's been our position.
This news might help the Magnificent-7, which have slightly outperformed the Impressive-493 in recent days, continue to do so (chart).
The forward P/E of the Mag-7 peaked last year at 32 on October 28. It is down to 25 now (chart). We recommended underweighting them on December 7. Now, we would market-weight them, especially now that they are more sanely valued and after Oracle's news. During the pandemic crisis, they outperformed. They might do so again if the latest Middle East crisis isn't resolved soon.
If you believe the Middle East crisis will be resolved soon, transportation stocks, especially airlines, should continue to respond favorably to that prospect. Defense stocks should underperform. Indeed, the iShares US Aerospace & Defense ETF (ITA) is down 4.3% since it peaked at a record high on March 2 (chart). Energy-related stocks would also experience some profit-taking if the war is likely to end soon.
The US is currently the world's largest producer of oil and natural gas. Lower oil and gas prices are not good for US producers, but they are very good for American consumers. Overseas importers of oil and gas would benefit more than the US from an end to the war.
From the 2000s until the Great Virus Crisis, oil prices were highly correlated with the iShares Emerging Markets ETF (EEM) because both reflected how EM economies were faring (chart). In recent years, the two series have been diverging, suggesting that as EMs have emerged, they are importing more oil and gas. So rising (falling) energy costs have a positive (negative) effect on EM economic growth and stock markets.
The recent jumps in oil and gas prices have weighed on EEM. Energy costs will likely decline sharply when the war ends giving a big boost to EMs. The only question is, when will the war end?
We are still waiting to see tankers crossing the Strait of Hormuz without being attacked by Iranian suicide drones.
Back in the USA, today's NFIB survey of small business owners showed that the percentage of small business owners with job openings edged up in February and remains above its historical average, while the percentage planning to hire over the next three months fell back to the series' historical average (chart).
Last, but not least, the Bull/Bear Ratio dropped sharply this week to 2.25 (chart). It is heading in the right direction for contrarians to turn bullish. We still want to see tankers sailing through the Strait.
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