BP said its third-quarter profit rose, benefiting from higher realized refining margins and oil and gas production, although it missed expectations.
The British oil-and-gas major said Tuesday that it made an underlying replacement cost profit—a metric similar to net income that U.S. oil companies report—of $3.29 billion in the three months to the end of September, up from $2.59 billion in the preceding quarter. This missed an averaged analysts’ forecast compiled by the company of $4.01 billion.
Oil futures dropped Sunday night as markets saw a calm opening following Israel’s launch of a ground offensive in Gaza that drew implied threats from Iran amid market fears of a wider conflict that could disrupt global crude supplies.
Oil declined as Israel “seems to be approaching the situation with caution, which has brought a sense of relief that the worst-case scenarios may not materialize,” said Stephen Innes, managing partner at SPI Asset Management, in a note.
Innes, however, said investors should remember “this is likely to be a long, drawn-out affair with many false dawns.”
West Texas Intermediate crude for December delivery CL00, -1.51%
CLZ23, -1.51%
fell 93 cents, or 1%, to $84.61 a barrel on the New York Mercantile Exchange on Sunday night. December Brent crude BRNZ23, -1.34%,
the global benchmark, was off $1, or 1.1%, at $89.48 a barrel on ICE Futures Europe, dipping back below the $90-a-barrel threshold.
Oil futures jumped nearly 3% on Friday, but suffered weekly declines, eroding the modest risk premium priced into the market.
Israeli solders had moved at least two miles deep into the Gaza Strip as of Sunday, the Wall Street Journal reported, after beginning a delayed ground incursion into the enclave aimed at routing Hamas following its Oct, 7 attack on southern Israel that left more than 1,400 dead and saw more than 200 Israelis taken hostage.
A sustained bombardment of the densely populated Gaza Strip by Israel has resulted in more than 8,000 casualties, according to Palestinian authorities. Israel has been under pressure by the U.S. and others to minimize civilian casualties.
U.S. stock-index futures ticked higher, with S&P 500 futures ES00, +0.32%
up 0.3%, while futures on the Dow Jones Industrial Average YM00, +0.20%
added 68 points, or 0.2%.
The biggest worry among investors is a conflict that sees Iran become more directly involved. Iranian crude exports have rebounded from lows seen after the Trump administration withdrew the U.S. from a nuclear accord with Tehran and reimposed sanctions in 2018.
A renewed crackdown on Iran could take up to 1 million barrels a day of crude off the market, while a spiraling conflict could see Tehran threaten transportation chokepoints, particularly the Strait of Hormuz, or otherwise attack infrastructure in the region, while driving up a fear premium.
Iranian President Ibrahim Raisi, in a post on X written in English, said Saturday that Israel had “crossed the red lines, which may force everyone to take action.”
U.S. warplanes on Friday struck two locations in eastern Syria, which the Pentagon said were linked to Iran’s Revolutionary Guard Corps, following a string of attacks on U.S. air bases in the region that started last week.
U.S. stocks are poised to book another round of monthly losses as October draws to an end, though pressure has been attributed largely to a surge in Treasury yields. The S&P 500 SPX
last week joined the Nasdaq Composite COMP in correction territory, while the Dow DJIA
is down more than 2% year to date.
The rise in yields, which move opposite price, has come as U.S. government debt has failed to attract its usual haven-related buying amid rising Mideast tensions.
Marathon Petroleum’s oil refinery in Anacortes, Washington.
David Ryder | Reuters
Energy heavyweights Chevron and Exxon Mobil announced shiny new acquisitions this month — and some industry watchers say it could be the start of more multibillion megadeals to come.
The announcement comes just weeks after Exxon Mobil announced its purchase of shale rival Pioneer Natural Resources for $59.5 billion in an all-stock deal. While this marks Exxon’s largest deal since its acquisition of Mobil, the merger would also double the oil giant’s production volume in the largest U.S. oilfield, the Permian Basin.
“The big-money acquisition of Hess by Chevron accelerates the trend of consolidation and big-money deals,” energy consultancy Rystad Energy said in a note.
Although Chevron’s acquisition is the continuation of a story started by the Exxon-Pioneer deal, its motivation and impact is slightly different, the note stated.
Exxon is zoning in on its core operations in the Permian basin, while Chevron has decided to expand into where it does not yet have existing assets: Guyana and the Bakken shale.
These megadeals are just a prelude to this large investment wave I expect in coming years.
Bob McNally
President of Rapidan Energy Group
Kpler’s economist Reid I’Anson said the Exxon-Pioneer deal is “likely a bit less risky” compared to the Chevron-Hess deal.
Exxon will see more immediate returns and Pioneer alone would add 711,000 barrels per day, he said comparing it to just 386,000 barrels per day from Hess.
“However, the Chevron acquisition likely has more upside given the future production growth potential out of Guyana,” he noted.
That said, both Exxon and Chevron’s megadeals are indicative of a larger, overarching ambition.
Consolidation has been a focus in the North American shale space in the past year, especially in the Permian basin where larger exploration and production (E&Ps) have “swallowed up” smaller operations in the bid to bolster drilling inventories and boost free cash flow, Rystad’s senior shale analyst Matthew Bernstein told CNBC.
Silhouette of Permian Basin pumpjacks taken at dusk, north of Midland, Texas, U.S. in late 2019.
Richard Eden | via Getty Images
The upstream segment of the oil and gas industry refers to the exploration for oil or gas deposits, as well as extraction and production of those materials.
The Permian basin is a shale patch that sits between Texas and Mexico, which saw a slew of deals this year.
“These megadeals are just a prelude to this large investment wave I expect in coming years,” Bob McNally, president of Rapidan Energy Group, told CNBC via email. With Exxon deepening its presence in the U.S. shale sector, and Chevron’s eyes on Guyana, the two deals will instill more confidence in the wider oil industry to overcome any hesitation and invest in oil and gas, McNally continued.
“These deals signify the shift from a multi-year bust phase in oil that began in 2014 to a multi-year boom phase that should last well through this decade,” he forecasts.
The deals by the two largest publicly traded major oil companies appear to confirm that crude oil demand will remain strong over the long term, said Andrew Woods, Mintec’s industrial analyst.
Dan Pickering, founder of Pickering Energy Partners, echoed similar sentiments, saying that both energy behemoths believe oil demand has not yet peaked.
On Tuesday, the International Energy Agency reported that demand for oil, coal and natural gas is set to peak before the end of the decade, on the back of rising clean energy technologies.
Oil prices year-to-date
A peak in oil demand refers to the point in time when the highest level of global crude demand is reached, in which a permanent decline would then follow. This would theoretically decrease the need for investments in crude oil projects as other energy sources take precedence.
“We are clearly entering into a period of consolidation,” Pickering said, adding it is not just megadeals that the oil industry will be seeing, but also many “merger-of-equals” amongst small or mid-sized companies with market capitalizations between $3 billion to $30 billion.
Pickering said investors currently do not want volume growth, but prefer capital discipline — a shift from focusing on production volume to a focus on financial value.
“Instead of drilling to grow production or cash flow, companies are now combining to gain scale, lower costs and grow earnings and cash flow without meaningful incremental volumes,” he said.
Siemens Energy AG is in talks with the German government about securing as much as €16 billion ($16.9 billion) in state guarantees as problems at its wind-turbine unit spread to the rest of the business. Shares plummeted 40%.
The company is seeking backstops over a two-year period after major shareholder and former parent company Siemens AG indicated it was no longer willing to help, according to people familiar with the matter. The company said Thursday it’s also speaking to banks, and the government confirmed the talks.
Siemens Energy needs the guarantees to win new large-scale contracts to build transmission networks and gas turbines. While those units are profitable, they’re now threatened by the strain that the string of losses from the Gamesa wind unit is putting on the company’s balance sheet in what has become one of Germany’s biggest industrial debacles.
The guarantees have become crucial after the company earlier this year forecast a €4.5 billion loss for fiscal 2024 despite assurances it had finally come up with a plan to address problems with certain wind turbines. S&P in July downgraded it to BBB-minus with a stable outlook from BBB with a negative outlook.
While the company has been working on a broad review of the turbine unit, final findings have yet to come through.
Siemens Energy shares took their the biggest intraday drop since the company was spun out of Siemens in September 2020. The slump triggered multiple trading halts and cut the manufacturer’s market capitalization by around €3.4 billion. It was the biggest drop for a stock listed on Germany’s DAX index since the collapse of Wirecard in June 2020.
The paper value of Siemens AG’s stake was cut by more than €800 million. Its shares fell as much as 5.9%.
“Siemens is now in close and continuous talks with all parties involved,” the company said in a statement. “As we have always said, we will make our decisions in line with the interests of Siemens AG and its shareholders.”
Siemens Energy doesn’t have acute liquidity problems, according to the people familiar with the talks. But the guarantees are important for securing the financing it needs for longer term projects, particularly in its gas and power division.
“We are therefore initiating measures to strengthen our balance sheet and are in talks with the German government on how to secure guarantee structures in the fast-growing energy market,” Siemens Energy spokesman Oliver Sachgau said.
Economy Minister Robert Habeck, speaking in Ankara, said the talks are “good and constructive.”
“We have already been talking intensively since Siemens Energy made this public and contacted us, and we have increased this intensity in the last 2 weeks,” Habeck said.
The company still has €110 billion in back orders. Germany’s RWE AG plans to build over 1 gigawatt of onshore wind farms with Siemens Gamesa turbines in the next four years, but declined to comment on whether the projects can still be carried out as planned.
Net losses and cash outflow are now expected to exceed market forecasts for the year, the manufacturer said.
Citi analysts led by Vivek Midha said uncertainty about the fourth quarter remains “very high.”
“The magnitude of the shortfall to estimates is unspecified, though clearly if it were minor, it is unlikely that it would have been flagged,” they said in a note. “Even if ENR has no near-term liquidity issue, the comment around measures to strengthen balance sheet is broad, meaning that investor concerns around an equity raise are likely to intensify.”
— With assistance by Eyk Henning, Kamil Kowalcze, Jan-Patrick Barnert, Joe Easton, and Allegra Catelli
Wind turbines and a lignite-fired power plant photographed in in Germany.
Jan Woitas | Picture Alliance | Getty Images
Demand for oil, coal and natural gas is set to peak before the end of this decade, with fossil fuels’ share in the world’s energy supply dropping to 73% by the year 2030 after being “stuck for decades at around 80%,” the International Energy Agency said Tuesday.
A transformative shift in how the planet is powered is also underway, with the “phenomenal rise of clean energy technologies” like wind, solar, heat pumps and electric cars playing a crucial role, according to a statement accompanying the IEA’s World Energy Outlook 2023 report.
Energy related carbon dioxide emissions are also on course to peak by the year 2025.
Despite these seismic shifts, the IEA says more effort is required to limit global warming to 1.5 degrees Celsius, a key goal of the Paris Agreement on climate change.
The IEA’s analysis of governments’ “current policy settings” shows the world’s energy system is on course to look very different in the next few years.
In its statement, the Paris-based organization said it sees “almost 10 times as many electric cars on the road worldwide” in 2030, with “renewables’ share of the global electricity mix nearing 50%,” higher than the roughly 30% today.
Among other things, heat pumps — as well as other electric heating systems — are on course to outsell boilers that use fossil fuels.
“If countries deliver on their national energy and climate pledges on time and in full, clean energy progress would move even faster,” the IEA’s statement said.
“However, even stronger measures would still be needed to keep alive the goal of limiting global warming to 1.5 °C,” it added.
“As things stand, demand for fossil fuels is set to remain far too high to keep within reach the Paris Agreement goal of limiting the rise in average global temperatures to 1.5 °C,” the statement went on to say.
In a sign of how high the stakes are, the IEA’s report said its Stated Policies Scenario was now “associated with a temperature rise of 2.4 °C in 2100 (with a 50% probability).”
Read more about electric vehicles, batteries and chips from CNBC Pro
Tuesday’s report reaffirms the content of an op-ed published in September 2023 that was authored by the IEA’s executive director, Fatih Birol, and published in the Financial Times.
In remarks published Tuesday, Birol sought to emphasize the huge potential for change while also highlighting the massive amount of work that still needs to be done.
“The transition to clean energy is happening worldwide and it’s unstoppable,” he said. “It’s not a question of ‘if’, it’s just a matter of ‘how soon’ — and the sooner the better for all of us,” he added.
“Governments, companies and investors need to get behind clean energy transitions rather than hindering them,” Birol said.
“There are immense benefits on offer, including new industrial opportunities and jobs, greater energy security, cleaner air, universal energy access and a safer climate for everyone.”
“Taking into account the ongoing strains and volatility in traditional energy markets today, claims that oil and gas represent safe or secure choices for the world’s energy and climate future look weaker than ever,” Birol said.
The IEA’s report comes just weeks ahead of the U.N.’s COP28 climate change summit in the United Arab Emirates.
The shadow of the Paris Agreement, reached at COP21 in late 2015, looms large over the IEA’s report.
The landmark accord aims to “limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.”
The challenge is huge, and the United Nations has previously noted that 1.5 degrees Celsius is viewed as being “the upper limit” when it comes to avoiding the worst consequences of climate change.
Chevron said Monday it will buy Hess Corp. for $53 billion, marking the second major oil deal this month as major producers seize the initiative while oil prices surge.
The Chevron-Hess deal comes less than two weeks after Exxon Mobil said that it would acquire Pioneer Natural Resources for about $60 billion. Chevron is paying for Hess with stock, with shareholders receiving 1.025 shares of Chevron for each Hess share. Chevron said the deal is valued at $60 billion, including debt.
The acquisition of Hess will add a major oil field in Guyana as well as shale properties in the Bakken Formation in North Dakota to Chevron’s portfolio. Crude prices have jumped 9% this year and have been hovering around $90 per barrel for about two months. Energy prices spiked sharply immediately after Russia invaded Ukraine in early 2022.
The Chevron-Hess deal “is the second major energy deal struck this month … and officially means a round of consolidation is underway that will likely see more transactions unveiled before the process concludes,” noted Vital Knowledge in a Monday research note.
Buying Hess will provide Chevron with a “a premier exploration and production company with ownership in the industry’s most attractive, long-lived growth asset in Guyana and a focused portfolio elsewhere that complements Chevron’s,” Chevron CEO Mike Wirth said in a Monday conference call to discuss the acquisition.
Play for Guyana’s oil
Guyana is a South American country of 791,000 people that is poised to become the world’s fourth-largest offshore oil producer, placing it ahead of Qatar, the United States, Mexico and Norway. It has become a major producer in recent years with oil giants, including Exxon Mobil, China’s CNOOC, and also Hess, squared off in a heated competition for highly lucrative oil fields in northern South America.
Chevron said the deal will help to increase the amount of cash given back to shareholders. The company anticipates that in January it will be able to recommend boosting its first-quarter dividend by 8% to $1.63. This would still need board approval.
The company also expects to increase stock buybacks by $2.5 billion to the top end of its guidance range of $20 billion per year once the transaction closes, which Chevron said it expects to occur in the first half of 2024.
The deal arrives a month after unions ended disruptive strike actions at Chevron’s three liquefied natural gas plants in Australia that provide more than 5% of global LNG supplies.
The boards of both companies have approved the Hess deal, which is targeted to close in the first half of next year. It still needs approval by Hess shareholders. John Hess, the company’s CEO, is expected to join Chevron’s board. His family owns a large chunk of Hess.
Shares of Chevron Corp., based in San, Ramon, California, declined more than 3% before the opening bell Monday. Share of Hess Corp., based in New York City, rose slightly.
Chevron said it would buy Hess in an all-stock deal worth $53 billion, in the latest sign of consolidation in an oil-and-gas industry flush with cash.
The U.S. energy giant said buying Hess would upgrade and diversify its portfolio, adding a large oil asset in Guyana and bolstering its U.S. shale operations. Chevron also highlighted the attraction of Hess’s assets in the Gulf of Mexico and its natural-gas business in Southeast Asia.
Fuel prices, with the cost of gasoline and diesel at the pump both down from a month ago, don’t appear to be fazed by the escalating risks to oil supplies in the Middle East from the Israel-Hamas war, but they are.
The decline in fuel prices seen nationally is actually a “bit above what would be ‘normal’ for this time of year,” said Patrick De Haan, head of petroleum analysis at GasBuddy. However, he believes “prices won’t fall as far as they would have had the attacks on Israel not happened.”
On Friday, the average retail price for a gallon of regular gasoline stood at $3.528, down 5.7 cents from a week ago, while the average retail diesel price was at $4.465 a gallon on Friday, down 7.8 cents from Sept. 30, according to data from GasBuddy.
U.S. retail gasoline prices have fallen so far this month.
GasBuddy
“Geopolitical risk is now heightened, changing the calculus” for the fuel market, said Brian Milne, product manager, editor and analyst at DTN.
‘Seasonal component’
In considering retail gasoline prices during the fourth quarter, the “seasonal component is less pronounced than in years past,” said Milne. Demand for gasoline tends to fall following the summer travel season. Combined with a “strong slate of refinery maintenance,” which led to less fuel supply on the market, the rise in crude oil prices has slowed the decline in fuel prices, said Milne.
If not for the heightened geopolitical risk in the Middle East, he said he might have expected to see gasoline prices decline by another 30 cents to 40 cents per gallon into late December because of lower demand.
Retail gas prices may fall another 20 cents a gallon or more, depending on the location within the U.S., if we avoid broader hostilities in the Middle East, said Milne.
However, if a conflict breaks out beyond Israel and the Gaza Strip, gasoline prices are likely to move sharply higher because of a spike in crude costs, he said.
For its part, oil has seen volatile trading following the Hamas attack on Israel on Oct. 7, with futures prices for U.S. benchmark West Texas Intermediate crude CLZ23, -0.42%
For now, California, which typically is among the states that pays the most per-gallon for gasoline partly due to taxes on the fuel, is seeing prices “plummet” — down nearly 60 cents in the last three weeks, said GasBuddy’s De Haan.
“The West Coast is certainly seeing a much larger decline than is ‘normal’ and it’s due to the refinery situation now improving drastically,” as well as California’s RVP waiver, he said.
The California Air Resources Board allowed gasoline sold or supplied for use in California that exceeds the RVP, or Reid Vapor Pressure, limits through the end of Oct. 31, marking an early transition for the state from the lower RVP gas used in the summer to help cut gasoline emissions to the higher RVP gas used in the winter.
On Friday, the average price for a gallon of regular gasoline in California sold for $5.476, GasBuddy data show. That’s down 16.7 cents in just the last week.
Gas price outlook
De Haan said he does not expect to see a spike in gas prices nationally at this point, and there’s still room for prices to fall — just not as much following the Hamas attack on Israel.
“If we get to November and Iran gets involved in the situation, then we certainly could see gas prices impacted in some way as the current drops will likely be fully passed on by then, giving stations no ‘room’ to absorb higher prices reflected by a potential rise in oil,” said De Haan.
Still, falling demand, as well as “seasonality in general,” are what are pushing prices down, “enhanced by refinery improvements in areas” that saw price surges, he said.
Prices may even fall further after refinery maintenance season wraps up in mid-November, and refiners have to find places to put even more gasoline output, said De Haan.
He’s comfortable with the gasoline price forecasts GasBuddy issued in December of last year, which predicted a monthly national average for the fuel of $3.53 for October — matching the current price. The forecast also called for an average of $3.36 a gallon for November and $3.17 for December.
GasBuddy doesn’t have a forecast for 2024 yet, but prices may look similar to this year, as long as the situation in the Middle East doesn’t further crumble,” said De Haan.
View on diesel
Diesel, however, is another story.
Price for that fuel have dropped by 85.5 cents a gallon from a year ago to Friday’s $4.465 level, GasBuddy data show.
U.S. retail diesel prices are sharply lower than a year ago.
GasBuddy
While down from a year ago, diesel prices are currently at a “very high level historically” because global supply is low, said DTN’s Milne.
At this time in 2022 diesel fuel inventory was even tighter than it is now, and Europe was heading into winter without Russian natural gas after it was cutoff following the invasion of Ukraine, he said.
That led to a spike in natural-gas prices and prices for gasoil, a European heating oil, also surged, lifting heating oil and diesel prices globally, explained Milne.
Like gasoline, diesel prices could move “sharply higher if the war in Israel expands, and oil flow is put at greater risk,” he said.
De Haan, meanwhile, said diesel prices could climb closer to $5 a gallon if there’s a “squeeze,” with relief then [coming] in the spring/summer” seasons.
Every weekday the CNBC Investing Club with Jim Cramer holds a Morning Meeting livestream at 10:20 a.m. ET. Here’s a recap of Monday’s key moments. 1. U.S. stocks climbed higher Monday, with both the S & P 500 and Nasdaq Composite gaining more than 1% in midmorning trading. Bank stocks were some of Monday’s outperformers, with Club holding Wells Fargo (WFC) up more than 2% following the firm’s quarterly earnings beat on Friday. At the same time, bond yields pushed higher, with that of the 10-year Treasury again rising above 4.7%, ahead of a speech by Federal Reserve Chair Jerome Powell later this week. And oil prices tumbled more than 1% following last week’s 6% surge, as West Texas Intermediate crude hovered just below $87 a barrel. 2. We rang the register on Pioneer Natural Resources (PXD) on Monday, following the announcement of Exxon Mobil ‘s (XOM) $59.5 billion all-stock acquisition of the shale player. We could have held out for the deal to close and become XOM shareholders, while collecting a few dividend payments. But there’s always a possibility the transaction could fall apart, which would likely cause PXD to give back some of the roughly 18% premium Exxon agreed to pay for it. So, we’d rather have the cash on hand to potentially build up our position in Coterra Energy (CTRA) on pullbacks. 3. Piper Sandler named Club holding Microsoft (MSFT) its highest conviction large-cap stock to own into year-end, citing the software giant’s “first-mover advantage” in generative artificial intelligence. Microsoft is set to release its AI assistant — known as M365 Copilot — for products like like Office, Word and Excel to the general public on Nov. 1. This is definitely a stock we continue to like and would look for further opportunities to pick up more shares on weakness. (Jim Cramer’s Charitable Trust is long WFC, CTRA, MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
The JPMorgan Chase & Co. headquarters in New York, US, on Friday, July 7, 2023.
Michael Nagle| Bloomberg | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Markets lost momentum Major U.S. indexes mostly slipped Friday, though the Dow Jones Industrial Average bucked the trend to inch up slightly. Asia-Pacific markets dipped Monday. Mainland China’s Shanghai Composite fell around 0.4%, and the yuan weakened marginally, as the People’s Bank of China left its short- and medium-term lending rates unchanged.
Booming profits at JPMorgan JPMorgan Chase’s third-quarter profit surged 35% from a year ago to hit $13.15 billion, while revenue popped 21% to $40.96 billion, surpassing expectations. Net interest income, at $22.9 billion, was 30% higher than the same period in 2022, beating estimates by around $600 million. Shares of the bank climbed 1.5% Friday. Still, CEO Jamie Dimon warned we’re facing “the most dangerous time” in decades.
Hot oil On Friday, prices of both U.S. West Texas Intermediate and Brent crude futures soared more than 5.7% to $87.72 and $90.89 per barrel, respectively. That’s the highest jump in a day for both crude futures since April 3. (Prices remained mostly unchanged during Asia trading hours Monday.) Meanwhile, U.S. oil production hit an all-time high last week, marking a comeback in the domestic industry.
‘Path to a Palestinian state’ U.S. President Joe Biden said in a televised interview Sunday the Palestinian militant group Hamas must be neutralized — but there also “needs to be a path to a Palestinian state.” Separately, China’s Foreign Minister Wang Yireportedly told his Saudi Arabia counterpart Faisal bin Farhan Al Saud that “Israel’s actions have gone beyond self-defense.”
[PRO] All eyes on banks Keep your eye on banks posting results this week — the numbers will provide clues to many aspects of the economy, such as consumers’ strength and whether corporate borrowing and dealmaking are returning. Wall Street banks like Goldman Sachs and Bank of America report earnings Tuesday, followed by regional banks — and Morgan Stanley — on Wednesday.
Going into this earnings season, analysts feared big banks’ income wouldn’t hold up from the previous quarters. Those fears didn’t materialize — for now.
Net interest income, in particular, was higher than expected. That’s the amount banks pocket when they give depositors a low (or zero!) interest rate on their savings, and charge borrowers a high interest rate, usually pegged to the federal funds rate.
Given the high yields on U.S. Treasury and money market funds, analysts thought banks would be forced to shower depositors with higher interest rates, reducing net interest income. That didn’t happen. On the contrary, net interest income rose from a year ago at JPMorgan and Wells Fargo, and beat expectations at Citigroup.
But JPMorgan CEO Jamie Dimon isn’t feeling complacent about that. Dimon acknowledged that his bank’s “over-earning” on net interest income, a benefit that will vanish eventually.
For a preview of that, we don’t have to wait for the following quarters. We just have to look at BlackRock’s third-quarter earnings. Clients pulled their money from BlackRock’s active unit and its index and ETF unit because “for the first time in nearly two decades, clients are earning a real return in cash and can wait for more policy and market certainty before re-risking,” CEO Larry Fink said.
Meanwhile, gold saw its best day of the year on Friday. December futures contracts for the safe-haven metal rose 3.11%, putting it 6.31% higher than its level at the start of 2023. That’s another sign risky assets are losing attractiveness.
It isn’t just investors who are feeling jittery. Outside financial markets, consumer sentiment is slumping, as indicated by the University of Michigan’s survey. But that’s not really a surprise, given the geopolitical shocks and human tragedy unfolding currently.
“The war in Ukraine compounded by last week’s attacks on Israel may have far-reaching impacts on energy and food markets, global trade, and geopolitical relationships,” Dimon said. “This may be the most dangerous time the world has seen in decades.”
The JPMorgan Chase & Co. headquarters in New York, US, on Friday, July 7, 2023.
Michael Nagle | Bloomberg | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Markets lost momentum Major U.S. indexes mostly slipped Friday, though the Dow Jones Industrial Average bucked the trend to inch up slightly. Europe’s Stoxx 600 slipped around 1%, weighed by a 2.5% drop in technology stocks. Separately, Mārtiņš Kazāks, one of the European Central Bank’s more hawkish members, told CNBC he was “quite happy” with current rate levels.
Booming profits at JPMorgan JPMorgan Chase’s third-quarter profit surged 35% from a year ago to hit $13.15 billion, while revenue popped 21% to $40.96 billion, surpassing expectations. Net interest income, at $22.9 billion, was 30% higher than the same period in 2022, beating estimates by around $600 million. Shares of the bank climbed 1.5% Friday. Still, CEO Jamie Dimon warned we’re facing “the most dangerous time” in decades.
And at Citigroup and Wells Fargo Citigroup’s net income and revenue for the third quarter were higher than analysts’ expectations, rising 2% and 9% year over year, respectively. Despite that, Citigroup’s shares dipped 0.24% for the day. Meanwhile, Wells Fargo also beat Wall Street estimates. The bank’s third-quarter earnings rocketed 60% and revenue rose 6.5% from a year earlier, boosting its shares by 3.07%.
Hot oil Prices of both U.S. West Texas Intermediate and Brent crude futures soared more than 5.7% to $87.72 and $90.89 per barrel, respectively. That’s the highest jump in a day for both crude futures since April 3. The oil market’s “fraught with uncertainty,” the International Energy Agency said, as the U.S. tightens sanctions against Russian crude exports Thursday and the Israel-Hamas war escalates further.
[PRO] All eyes on banks Keep your eye on banks posting results this week — the numbers will provide clues to many aspects of the economy, such as consumers’ strength and whether corporate borrowing and dealmaking are returning. Wall Street banks like Goldman Sachs and Bank of America report earnings Tuesday, followed by regional banks — and Morgan Stanley — on Wednesday.
Going into this earnings season, analysts feared big banks’ income wouldn’t hold up from the previous quarters. Those fears didn’t materialize — for now.
Net interest income, in particular, was higher than expected. That’s the amount banks pocket when they give depositors a low (or zero!) interest rate on their savings, and charge borrowers a high interest rate, usually pegged to the federal funds rate.
Given the high yields on U.S. Treasury and money market funds, analysts thought banks would be forced to shower depositors with higher interest rates, reducing net interest income. That didn’t happen. On the contrary, net interest income rose from a year ago at JPMorgan and Wells Fargo, and beat expectations at Citigroup.
But JPMorgan CEO Jamie Dimon isn’t feeling complacent about that. Dimon acknowledged that his bank’s “over-earning” on net interest income, a benefit that will vanish eventually.
For a preview of that, we don’t have to wait for the following quarters. We just have to look at BlackRock’s third-quarter earnings. Clients pulled their money from BlackRock’s active unit and its index and ETF unit because “for the first time in nearly two decades, clients are earning a real return in cash and can wait for more policy and market certainty before re-risking,” CEO Larry Fink said.
Meanwhile, gold saw its best day of the year on Friday. December futures contracts for the safe-haven metal rose 3.11%, putting it 6.31% higher than its level at the start of 2023. That’s another sign risky assets are losing attractiveness.
It isn’t just investors who are feeling jittery. Outside financial markets, consumer sentiment is slumping, as indicated by the University of Michigan’s survey. But that’s not really a surprise, given the geopolitical shocks and human tragedy unfolding currently.
“The war in Ukraine compounded by last week’s attacks on Israel may have far-reaching impacts on energy and food markets, global trade, and geopolitical relationships,” Dimon said. “This may be the most dangerous time the world has seen in decades.”
Every weekday the CNBC Investing Club with Jim Cramer holds a Morning Meeting livestream at 10:20 a.m. ET. Here’s a recap of Friday’s key moments. 1. U.S. equities moved lower in midmorning trading Friday, with the S & P 500 down 0.2% and the Nasdaq Composite down 0.68%. Jim Cramer said that the market is now bifurcated, with bank stocks going higher on the back of strong earnings and Big Tech coming under pressure. At the same time, bonds rallied, with Treasury yields pulling back in a flight to safety. The yield on the closely-watched 10-year Treasury was hovering around 4.6%. And oil prices surged roughly 4% amid growing geopolitical risk, as West Texas Intermediate crude moved above $86 a barrel. Club energy name Pioneer Natural Resources (PXD) followed suit, climbing more than 2%, while Jim reiterated the Club’s intention to exit the position given Exxon Mobil’s planned acquisition of the shale company. 2. Club holding Wells Fargo (WFC) on Friday reported a 7% uptick in revenue year-over-year for the third quarter, with beats on both net-interest income and non-interest income. Earnings-per-share of $1.48 topped analysts’ estimates of $1.24 a share. The bank also raised its full-year 2023 net-interest-income growth outlook to 16%, up from guidance of 14% and ahead of the consensus estimate of 14%. Jim on Friday highlighted his belief in CEO Charlie Scharf’s ability to continue to turn around the bank under challenging circumstances, while suggesting he expects Wells Fargo stock to only move higher. Shares of WFC jumped roughly 3.8%, to more than $41 apiece. Stay tuned for a full Club analysis on the results later Friday. 3. Club holding Danaher (DHR) sold off late Thursday after German bioprocessing rival Sartorius (SARTF) preannounced a third quarter miss and lowered its organic-growth outlook due to a longer inventory destock from its U.S. and Chinese customers. But TD Cowen said Sartorius’ latest cut aligns its guidance more closely with that of Danaher, which was more conservative with its outlook last quarter. We expect Danaher’s stock will rally before the bottom of the of the bioprocessing cycle. “This is a stock to own,” Jim said Friday. (Jim Cramer’s Charitable Trust is long PXD, WFC, DHR. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Storage drums stacked in the Keihin industrial area of Kawasaki, Kanagawa Prefecture, Japan, on Wednesday, Oct. 11, 2023.
Bloomberg | Bloomberg | Getty Images
The International Energy Agency on Thursday said that oil markets are likely to remain on edge as the Israel-Hamas war persists, with investors closely monitoring the potential for output disruption in the Middle East.
The world’s leading energy watchdog said in its latest monthly oil market report, that while the conflict had not yet had a direct impact on physical supply, energy market participants would “remain on tenterhooks” as the crisis unfolds.
“The Middle East conflict is fraught with uncertainty and events are fast developing,” the IEA said in its report.
“Against a backdrop of tightly balanced oil markets anticipated by the IEA for some time, the international community will remain laser focused on risks to the region’s oil flows,” the energy agency added.
Noting a “sharp escalation in geopolitical risk,” the IEA said it would continue to closely monitor oil markets and “stands ready to act if necessary to ensure markets remain adequately supplied.”
In the event of an abrupt oil supply shortage, the IEA’s response includes member countries releasing emergency stocks and/or implementing demand restraint measures.
Israel is not a major oil producer and no major oil infrastructure runs close to the Gaza Strip.
The IEA notes, however, that the Middle East accounts for more than one third of global seaborne oil trade, and the Israel-Hamas conflict has ratcheted up fears the fighting may affect regional energy production.
The IEA report comes as the Israel-Hamas conflict enters its sixth day and follows a devastating and coordinated assault from Palestinian militant group Hamas on southern Israel over the weekend. Israel has since pulverized Gaza with airstrikes and is expected to launch a ground offensive against Hamas in the region in the coming days.
Israel has also ordered the “complete siege” of the Gaza Strip, seeking to stop the supply of electricity, food, water and fuel to the already blockaded population of roughly 2.3 million people.
As a result of the ongoing Israeli-Hamas war, at least 1,200 Israelis have been killed, with more than 2,700 injured, according to Israel’s military. Meanwhile, the Palestinian Ministry of Health says 1,203 people in Gaza have been killed, with 5,763 injured.
“The conflict has certainly raised geopolitical tensions in the Middle East, and this is something that we at the IEA are watching very closely,” Toril Bosoni, head of the oil markets division at the International Energy Agency, told CNBC’s “Street Signs Europe” on Thursday.
“For now, there has been no direct impact on supplies. We’re watching this. If it spills over and spreads to the wider Middle East this is, of course, a great concern,” Bosoni added. “This is something that is a major concern to the market.”
Asked whether the IEA was worried about the prospect of OPEC kingpin Saudi Arabia or other oil producers weaponizing oil exports in support of Hamas, Bosoni replied, “What we’re hearing from the OPEC+ alliance is that they stand ready to do what they can to stabilize the market, and this is really reassuring.”
“Of course, the IEA also has its tools to respond should there be a disruption to supply. For now, that is not something that we’re expecting,” she added.
When oil markets opened following the surprise attack by Hamas on Israel on Oct. 7, the IEA said traders priced in a $3 to $4 risk premium. However, prices have since stabilized.
The stock market always overreacts, and this year it seems as if investors believe dividend stocks have become toxic. But a look at yields on quality dividend stocks relative to the market underlines what may be an excellent opportunity for long-term investors to pursue growth with an income stream that builds up over the years.
The current environment, in which you can get a yield of more than 5% yield on your cash at a bank or lock in a yield of 4.57% on a10-year U.S. Treasury note BX:TMUBMUSD10Y
or close to 5% on a 20-year Treasury bond BX:TMUBMUSD20Y
seems to have made some investors forget two things: A stock’s dividend payout can rise over the long term, and so can it is price.
It is never fun to see your portfolio underperform during a broad market swing. And people have a tendency to prefer jumping on a trend hoping to keep riding it, rather than taking advantage of opportunities brought about by price declines. We may be at such a moment for quality dividend stocks, based on their yields relative to that of the benchmark S&P 500 SPX.
Drew Justman of Madison Funds explained during an interview with MarketWatch how he and John Brown, who co-manage the Madison Dividend Income Fund, BHBFX MDMIX and the new Madison Dividend Value ETF DIVL,
use relative dividend yields as part of their screening process for stocks. He said he has never seen such yields, when compared with that of the broad market, during 20 years of work as a securities analyst and portfolio manager.
Dividend stocks are down
Before diving in, we can illustrate the market’s current loathing of dividend stocks by comparing the performance of the Schwab U.S. Equity ETF SCHD,
which tracks the Dow Jones U.S. Dividend 100 Index, with that of the SPDR S&P 500 ETF Trust SPY.
Let’s look at a total return chart (with dividends reinvested) starting at the end of 2021, since the Federal Reserve started its cycle of interest rate increases in March 2022:
FactSet
The Dow Jones U.S. Dividend 100 Index is made up of “high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios,” according to S&P Dow Jones Indices.
The end results for the two ETFs from the end of 2021 through Tuesday are similar. But you can see how the performance pattern has been different, with the dividend stocks holding up well during the stock market’s reaction to the Fed’s move last year, but trailing the market’s recovery as yields on CDs and bonds have become so much more attractive this year. Let’s break down the performance since the end of 2021, this time bringing in the Madison Dividend Income Fund’s Class Y and Class I shares:
Fund
2023 return
2022 return
Return since the end of 2021
SPDR S&P 500 ETF Trust
14.9%
-18.2%
-6.0%
Schwab U.S. Dividend Equity ETF
-3.8%
-3.2%
-6.9%
Madison Dividend Income Fund – Class Y
-4.7%
-5.4%
-9.9%
Madison Dividend Income Fund – Class I
-4.7%
-5.3%
-9.7%
Source: FactSet
Dividend stocks held up well during 2022, as the S&P 500 fell more than 18%. But they have been left behind during this year’s rally.
The Madison Dividend Income Fund was established in 1986. The Class Y shares have annual expenses of 0.91% of assets under management and are rated three stars (out of five) within Morningstar’s “Large Value” fund category. The Class I shares have only been available since 2020. They have a lower expense ratio of 0.81% and are distributed through investment advisers or through platforms such as Schwab, which charges a $50 fee to buy Class I shares.
The opportunity — high relative yields
The Madison Dividend Income Fund holds 40 stocks. Justman explained that when he and Brown select stocks for the fund their investible universe begins with the components of the Russell 1000 Index RUT,
which is made up of the largest 1,000 companies by market capitalization listed on U.S. exchanges. Their first cut narrows the list to about 225 stocks with dividend yields of at least 1.1 times that of the index.
The Madison team calculates a stock’s relative dividend yield by dividing its yield by that of the S&P 500. Let’s do that for the Schwab U.S. Equity ETF SCHD
(because it tracks the Dow Jones U.S. Dividend 100 Index) to illustrate the opportunity that Justman highlighted:
Index or ETF
Dividend yield
5-year Avg. yield
10-year Avg. yield
15-year Avg. yield
Relative yield
5-year Avg. relative yield
10-year Avg. relative yield
15-year Avg. relative yield
Schwab U.S. Dividend Equity ETF
3.99%
3.41%
3.20%
3.16%
2.6
2.1
1.8
1.6
S&P 500
1.55%
1.62%
1.79%
1.92%
Source: FactSet
The Schwab U.S. Equity ETF’s relative yield is 2.6 — that is, its dividend yield is 2.6 times that of the S&P 500, which is much higher than the long-term averages going back 15 years. If we went back 20 years, the average relative yield would be 1.7.
Examples of high-quality stocks with high relative dividend yields
After narrowing down the Russell 1000 to about 225 stocks with relative dividend yields of at least 1.1, Justman and Brown cut further to about 80 companies with a long history of raising dividends and with strong balance sheets, before moving further through a deeper analysis to arrive at a portfolio of about 40 stocks.
When asked about oil companies and others that pay fixed quarterly dividends plus variable dividends, he said, “We try to reach out to the company and get an estimate of special dividends and try to factor that in.” Two examples of companies held by the fund that pay variable dividends are ConocoPhillips COP, -0.29%
and EOG Resources Inc. EOG, +0.52%.
Since the balance-sheet requirement is subjective “almost all fund holdings are investment-grade rated,” Justman said. That refers to credit ratings by Standard & Poor’s, Moody’s Investors Service or Fitch Ratings. He went further, saying about 80% of the fund’s holdings were rated “A-minus or better.” BBB- is the lowest investment-grade rating from S&P. Fidelity breaks down the credit agencies’ ratings hierarchy.
Justman named nine stocks held by the fund as good examples of quality companies with high relative yields to the S&P 500:
Now let’s see how these companies have grown their dividend payouts over the past five years. Leaving the companies in the same order, here are compound annual growth rates (CAGR) for dividends.
Before showing this next set of data, let’s work through one example among the nine stocks:
If you had purchased shares of Home Depot Inc. HD, -0.39%
five years ago, you would have paid $193.70 a share if you went in at the close on Oct. 10, 2018. At that time, the company’s quarterly dividend was $1.03 cents a share, for an annual dividend rate of $4.12, which made for a then-current yield of 2.13%.
If you had held your shares of Home Depot for five years through Tuesday, your quarterly dividend would have increased to $2.09 a share, for a current annual payout of $8.36. The company’s dividend has increased at a compound annual growth rate (CAGR) of 15.2% over the past five years. In comparison, the S&P 500’s weighted dividend rate has increased at a CAGR of 6.24% over the past five years, according to FactSet.
That annual payout rate of $8.36 would make for a current dividend yield of 2.79% for a new investor who went in at Tuesday’s closing price of $299.22. But if you had not reinvested, the dividend yield on your five-year-old shares (based on what you would have paid for them) would be 4.32%. And your share price would have risen 54%. And if you had reinvested your dividends, your total return for the five years would have been 75%, slightly ahead of the 74% return for the S&P 500 SPX during that period.
Home Depot hasn’t been the best dividend grower among the nine stocks named by Justman, but it is a good example of how an investor can build income over the long term, while also enjoying capital appreciation.
Here’s the dividend CAGR comparison for the nine stocks:
This isn’t to say that Justman and Brown have held all of these stocks over the past five years. In fact, Lowe’s Cos. LOW, +0.27%
was added to the portfolio this year, as was United Parcel Service Inc. UPS, -0.16%.
But for most of these companies, dividends have compounded at relatively high rates.
When asked to name an example of a stock the fund had sold, Justman said he and Brown decided to part ways with Verizon Communications Inc. VZ, -0.94%
last year, “as we became concerned about its fundamental competitive position in its industry.”
Summing up the scene for dividend stocks, Justman said, “It seems this year the market is treating dividend stocks as fixed-income instruments. We think that is a short-term issue and that this is a great opportunity.”
Exxon Mobil Corp. confirmed Wednesday an agreement to buy shale driller Pioneer Natural Resources Co. in an all-stock deal valued at $59.5 billion, or $64.5 billion including debt.
“Pioneer is a clear leader in the Permian with a unique asset base and people with deep industry knowledge,” said Exxon Mobil Chief Executive Darren Woods. “The combined capabilities of our two companies will provide long-term value creation well in excess of what either company is capable of doing on a standalone basis.”
Pioneer shares rose 1.9% in premarket trading, while Exxon’s stock fell 1.3%.
Under terms of the deal, Pioneer shareholders will receive 2.3234 Exxon shares XOM, -0.42%
for each Pioneer share PXD, +0.76%
they own. The companies said that based on the Oct. 5 closing prices of $108.99 for Exxon’s stock and $214.96 for Pioneer’s stock, the deal values Pioneer shares at $253.23 each, or a 17.8% premium.
The deal combines Pioneer’s more than 85,000 net acres in the Midland Basin with Exxon’s 570,000 net acres in the Delaware and Midland Basins. Combined, the companies will have an estimated 16 billion barrels of oil equivalent in the Permian.
Exxon, Pioneer merger provides an estimated combined 16 billion barrels of oil equivalent resource in the Permian.
Exxon Mobil Corp.
Exxon said the merger will increase its lower-cost-of-supply production and short-cycle capital flexibility. From Pioneer’s assets, the company expects a cost of supply of less than $35 per barrel.
Exxon said the deal will accelerate plans to achieve net zero greenhouse gas emissions in the Permian, as the company plans to use its own plans to accelerate Pioneer’s net-zero emissions plan by 15 years, to 2035.
The deal is expected to immediately add to Exxon’s earnings per share and free cash flow when it closes, which is expected to occur in the first half of 2024. The merger is expected to result in “significant” synergies.
Siebert Williams Shank analyst Gabriele Sorbara expects the deal, which “fits perfectly” for Exxon, to generate about $2 billion of synergies over the next decade. Sorbara also sees an “inflection to improved well productivity” in the second half of 2023 and beyond, which isn’t currently reflected in analyst expectations, so it boost the benefit to Exxon.
While Sorbara expects some scrutiny from the Federal Trade Commission, but believes “the deal should ultimately close,” without the receipt of a competing bid.
Citi was lead financial advisor to Exxon, and Centerview Partners was financial advisor and Davis Polk & Wardwell was legal advisor. For Pioneer, Goldman Sachs, Morgan Stanley, Petrie Partners and Bank of America Securities were financial advisors and Gibson, Dunn & Crutcher LLP was legal advisor.
Exxon’s stock has rallied 12.7% over the past 12 months through Tuesday and Pioneer shares have slipped 3.5%. In comparison, the Energy Select Sector SPDR ETF XLE
has climbed 11.6% and the S&P 500 index SPX
has advanced 21.4%.
Damage to undersea gas and telecommunications links comes just over a year after sabotage to Nord Stream gas pipeline.
Damage to an undersea gas pipeline and telecommunications cable connecting Finland and Estonia appears to have been caused by “external activity”, Finnish and Estonian officials said.
The Finnish government on Tuesday reported damage to a gas pipeline and a telecommunications cable with Estonia following an unusual drop in pressure on Sunday in the Balticconnector gas pipeline, which led to its shutdown.
Speaking at a news conference, Finnish Prime Minister Petteri Orpo stopped short of calling the pipeline damage an act of sabotage but said it could not have been caused by regular operations.
“According to a preliminary assessment, the observed damage could not have occurred as a result of normal use of the pipe or pressure fluctuations. It is likely that the damage is the result of external activity,” Orpo said.
Finnish and Estonian authorities are working closely together to investigate the damage to 🇫🇮🇪🇪 undersea infrastructure. Finland is well prepared, our readiness is high and the situation is stable. Our security of supply is not threatened. #BalticConnector
Finland’s National Bureau of Investigation was leading an inquiry into the leak, Orpo said.
Finnish telecoms operator Elisa also confirmed on Tuesday that it suffered a break in a data cable connecting Finland and Estonia over the weekend.
Asked by a reporter whether Finland’s government suspected Russian involvement in the latest incident, Orpo said he did not want to speculate on potential perpetrators before authorities completed the investigation in Finland.
Estonian Prime Minister Kaja Kallas said that Estonia and Finland had informed their allies in NATO and the European Union regarding the incidents and she was in contact with the Finnish leader on the “next steps” to be taken.
“Both Estonia and Finland are taking these incidents very seriously and are doing everything possible to determine the circumstances,” Kallas said in a statement.
I convened ministers and relevant authorities to discuss incidents regarding #Balticconnector and an undersea communication cable.
While there’s no threat to our security of supply, both Estonia and Finland are taking the incidents very seriously.
The damaged cable and pipeline “are in very different locations, although the timing [of the incidents] is quite close”, Estonian Defence Minister Hanno Pevkur told a press briefing.
Pevkur said that Estonian authorities received photos confirming that the damage to the Balticconnector was “mechanical” and “human-made”.
“This damage must have been caused by some force that was not created by … a diver or a small underwater robot; the damage is more massive,” Pevkur said, adding that seismologists have previously stated there was no explosion at the incident site.
Heidi Soosalu, a seismologist at the Estonian Geological Service, told the Estonian public broadcaster ERR on Tuesday that neither Estonian nor Finnish seismic stations registered anything resembling explosions during the time period the Balticconnector registered a loss of pressure.
The incident comes just over a year after the Nord Stream gas pipelines running between Germany and Russia in the Baltic Sea were damaged by explosions believed to be sabotage. That case remains unsolved.
Estonia’s Navy told The Associated Press news agency they were conducting an investigation on the damaged gas pipeline together with the Finnish military in the Gulf of Finland.
The 77km-long (48 miles) Balticconnector pipeline runs across the Gulf of Finland from the Finnish city of Inkoo to the Estonian port of Paldiski. The 300 million euro ($318m) pipeline, largely financed by the EU, started commercial operations at the beginning of 2020.
The Balticconnector has been the only gas import channel to Finland, apart from LNG, since Russian imports were halted in May 2022, following Moscow’s full-scale invasion of Ukraine.
Russia stopped supplying gas to Finland after it refused to pay Moscow in rubles, a condition imposed on “unfriendly countries” – including EU member states – as a way to sidestep Western financial sanctions against Russia’s central bank.
European Commission President Ursula von der Leyen said she had spoken with Finnish premier Orpo and Estonia’s Kallas regarding damage to the gas pipeline and telecoms cable.
“Only by working together can we counter those seeking to undermine our security, and ensure that our critical infrastructure remains robust and reliable in the face of evolving threats,” von der Leyen said in a statement.
I held calls with Prime Ministers @kajakallas and @PetteriOrpo on the on-going investigations into the damage on the gas pipeline and data cable connecting Estonia and Finland.
I strongly condemn any act of destruction of critical infrastructure.
Global oil prices are rising amid the conflict between Israel and Hamas, sparking fears the turmoil could spread across the Middle East and threaten the world’s oil supply.
Both U.S. and global oil futures traded roughly 4% higher at around $86 a barrel on Monday after Hamas militants attacked a rash of Israeli towns over the weekend during a major Jewish holiday, although crude oil was trading slightly lower early Tuesday. The fighting has raised concerns that oil could cross the $100 per barrel threshold, compared with its current level of about $86, according to S&P Global.
While Israel is a small player in oil production, with just two oil refineries with a capacity of just under 300,000 barrels per day, the conflict risks involving other Middle East nations that are major producers, analysts noted. Of particular note is Iran, which U.S. and Israeli officials say is a primary supporter and funder of Hamas.
Iran, however, has denied any involvement in the attacks, and the Biden administration has said that while Tehran is “broadly complicit” in supporting Hamas terrorism, it has seen no evidence of a direct Iranian role in planning or carrying out the recent attack on Israel.”
The conflict could “become a wider conflagration,” drawing in the proxy agents of “Middle East regional players that are major oil exporters,” which could have an effect on oil prices, according to Alan Gelder, vice president of refining, chemicals and oil markets at energy research firm Wood Mackenzie.
“The most immediate market impact could be more stringent enforcement of [restrictions on] Iranian exports… by the U.S., if the conflict widens,” Gelder told CBS MoneyWatch.
The combination of new U.S. sanctions against Iran, as well as risks to shipping and infrastructure across the Middle East, could put at risk about 500,000 barrels per day of Iranian oil exports, S&P Global said. That could be an issue given that global supplies of oil were tight even before the conflict, which means that any impact could ripple throughout the world economy.
Will gas prices go up because of Israel?
Iranian oil production has surged by 700,000 barrels per day as Washington relaxed its enforcement of sanctions against Tehran, CNN reported, citing Brussels-based think tank Bruegel. However, if Washington tightens sanctions against Iran, that could limit its petroleum output, potentially affecting global oil and gas markets, according to Tom Kloza, global head of energy analysis for the Oil Price Information Service.
“Under some worried-about scenarios, tougher sanctions might suppress the growth in Iranian output we’ve seen so far in 2023,” Kloza told CBS MoneyWatch. “Under the most drastic circumstances, an Israeli attack on Iran might alter all the calculus for Middle East crude.”
However, U.S. consumers may not notice much of an impact at the pump, at least in the short term, experts said.
“Oil prices are up, but that’s much more a knee jerk reaction to the turmoil in the Middle East,” said Patrick De Haan, head of petroleum analysis at GasBuddy, told CBS MoneyWatch. “The major concern is … that Israel and Iran could get into conflict. That would be problematic [for U.S. gas prices.]”
Even if oil prices continue to rise, the impact at the pump may be muted due to the seasonal dip in gas prices during the fall months, De Haan wrote on X, formerly known as Twitter. That’s because gas prices typically decline in the autumn, following a traditional summer bump caused by a surge in demand as more Americans take vacations and hit the road.
“Even if oil went back to $90, these pressures still will win the tug of war, for now,” De Haan wrote.
Israel and gas prices
More than half of all crude oil reserves are in the Middle East, according to current estimates from the Organization of Petroleum Exporting Countries. However, neither Israel nor the Palestinian territories are key oil producers, data from the Energy Information Administration shows.
Yet the conflict between Israel and Hamas recalls the Yom Kippur war of 1973, when Egypt and Syria launched a surprise attack on Israel, noted Charles Gave of Gavekal Research in a Tuesday research note. While Israel was victorious, Middle Eastern oil exporters responded by cutting production and imposing an oil embargo on the nations that had supported Israel, he noted.
“The price of oil shot up from US$3.50/bbl to more than US$10/bbl, setting off a huge wave of inflation in the West,” causing deep recessions and budget deficits, Gave wrote. “Today, with supply and demand in the global oil market tightly balanced, there is a risk that supporters of one side or the other could target regional oil production, processing or transport, creating a squeeze in the supply of oil.”
Wall Street on Monday shook off a bout of selling sparked by the Israel-Gaza war.
That’s in keeping with the historical tendency of investors to look past geopolitical conflict and human tragedy, but it isn’t necessarily the last word. That last word will likely belong to oil traders.
“Oil rallied today yet remains below the near-term peak from last month. If oil prices rise higher for longer, the global economy could feel a resurgence of inflation during a period when investors are hoping inflation is clearly decelerating,” said Jeffrey Roach, chief economist for LPL Financial, in emailed comments.
Roach also noted that, in general, markets tend to have difficulty pricing the difference between a temporary shock and a permanent shock.
For now, however, the jump in oil prices isn’t signaling a permanent shock. Sure, Brent crude BRN00, +0.11%,
the global benchmark, jumped 4.2% on Monday to end at $88.15 a barrel, while West Texas Intermediate crude CL.1, +0.07%
CL00, +0.07%
surged $3.59, or 4.3% to $86.38 a barrel — the biggest one-day jump for both grades since April 3.
A direct role by Iran, a longtime ally of Hamas, would raise the threat of a broader conflict.
Some analysts have put Iranian crude production at more than 3 million barrels a day and exports above 2 million barrels a day — the highest levels since the Trump administration pulled the U.S. out of the Iranian nuclear accord in 2018, according to the Wall Street Journal. Sales fell to around 400,000 barrels a day in 2020 as the U.S. reimposed sanctions.
“If Israel discovers that Iran played a role in Hamas’ attack, it could retaliate militarily. At the very least, any warming of relations between Iran and the West is now on hold and this will limit incremental oil supply,” said Nicholas Colas, co-founder of DataTrek Research, in a Monday note.
It’s a reminder that “while neither Israel nor Gaza are major oil producers, everything that happens geopolitically in the Middle East invariably ends up affecting oil prices,” he said.
The potential for a broader conflict could lead to a “sharp market correction,” argued Olivier d’Assier, head of applied research, APAC, at Axioma.
The scale of the conflict, the largest since the Yom Kippur War 50 years ago, renders comparisons with how markets have shaken off past geopolitical incidents, but they may be irrelevant in terms of stress testing, he argued.
“The closest historical scenarios we could use would be 9/11 and the start of the Ukraine war. But because both took place on Western soil, they might not be adequate,” d’Assier said.
On Monday, however, remarks by Federal Reserve officials ultimately trumped the rise in crude prices and jitters over the Middle East. Dallas Fed President Lorie Logan and Fed Vice Chair Philip Jefferson both noted the rise in long-term Treasury yields and their role in tightening financial conditions, which investors took as a signal the Fed may not be as likely to further raise interest rates.
Stocks turned north after a morning dip, with the Dow Jones Industrial Average DJIA
rising nearly 200 points, or 0.6%, while the S&P 500 SPX
also advanced 0.6% and the Nasdaq Composite COMP
gained 0.4%.
For now, market participants appear set to look ahead to economic data later this week, including September consumer-price index and producer-price index readings.
Saudi Aramco said strong market conditions helped to push its second quarter net income to $48.4 billion, up from $25.5 billion a year earlier.
Maxim Shemetov | Reuters
Saudi oil giant Aramco on Monday announced a partnership with Siemens Energy AG to develop a small-scale direct air-capture “test unit” in an attempt to manage emissions.
The test unit will be built in Dhahran, Saudi Arabia and finished in 2024, according to a statement from Aramco on Monday.
Direct air-capture, or DAC, works by extracting carbon dioxide that has already been emitted into the atmosphere. The extracted CO2 can then be condensed into solid stone-like formations or liquefied to be stored underground.
DAC is the most expensive method of carbon capture, according to the International Energy Agency. It’s generally cheaper to remove CO2 at the source, before it’s emitted into the air.
The big price tag attached to DAC along with questions of its efficacy have made some climate scientists skeptical of its viability as a long-term emissions reduction strategy.
“From a physics point of view, we just made the problem thousands of times harder,” said Jonathan Foley who leads the climate solutions nonprofit Project Drawdown. “Imagine trying to remove 400 things out of a million and do it in the air. Then, efficiently liquefy this stuff and put it below ground. That’s a huge engineering marvel…to do it at the scale of billions of tons is science fiction right now.”
Foley added that DAC machines themselves take a lot of energy to get running, which eats away at whatever carbon reduction they do achieve.
But despite obstacles to scaling DAC, many companies, especially tech giants, are pouring investments into developing the technology. For example, Amazon announced last month that it would provide funding for the world’s largest deployment of DAC, and a coalition of tech companies led by Stripe has launched a public benefit company called Frontier to invest in carbon-capture startups and projects.
Extracting carbon from the atmosphere is attractive to companies with large carbon footprints, because it would allow them to keep emitting with a reversal mechanism after the fact.
“Fossil fuel companies would love to be able to keep emitting from fossil operations while offsetting those emissions via cost-effective direct air capture projects — that’s kind of a perfect world for them, if they can get there,” said Cara Horowitz, the executive director of UCLA’s Emmet Institute on Climate Change and the Environment.
“And even if they can’t get there, investing in the development of DAC allows them to tout efforts to achieve net-zero goals in ways that don’t involve reducing use of fossil fuels.”
So far, experts say, the technology is unproven at scale.
“I would love a machine like this to actually work. Wouldn’t that be great? You just turn on a machine that sucks everything out of the sky,” said Foley. “But sorry, it’s a lot easier not to emit it than it is to take it back out again. That’s just thermodynamics.”
The DAC collaboration between Aramco and Siemens Energy is still in early phases.
A Siemens Energy spokesperson told CNBC that once the test unit is complete next year, the companies will consider taking the technology into an official pilot phase. Only after that would they pursue scaling it commercially.
Given DAC’s adolescence, both oil companies are invested in other clean energy technology projects.
The spokesperson for Siemens Energy said that the company has invested in hydrogen, wind, nuclear fusion and others. Meanwhile, Aramco also has projects in hydrogen and geothermal energy.
