Postcards: Higher for Longer... and Understanding The Global Energy Landscape

Today's Consumer Price Index (CPI) number was hardly a surprise. I've been arguing that investors should hedge since the start of the year. It's unclear if this is the start of something big... ͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­ Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Postcards: Higher for Longer... and Understanding The Global Energy Landscape]( Today's Consumer Price Index (CPI) number was hardly a surprise. I've been arguing that investors should hedge since the start of the year. It's unclear if this is the start of something big... [Garrett {NAME}]( Feb 13   [READ IN APP](   Market Update: The CPI number wasn’t a huge surprise, but when you dig into the report - the cost of living in America continues to explode. Car insurance is up more than 20%. Car repairs are up 6.5%. Just traveling… up nearly 10%. This is what happens when the central bank attempts to engage in inflation targeting. The cost of the things that matter goes up. The things that don’t matter (technology… headphones)… go down. I’ve been on the record saying that I don’t expect a rate cut in the first half of this year. The odds of a rate cut in March are now down to 9.5%. I still think it will be July… and we haven’t even hit terminal velocity yet on the job market. It’s easy to blame the Fed… you shouldn’t blame the central bank entirely. Blame Janet Yellen. Peter Schiff offered a great take on the impact of this spending and debt this week. It is the same thing I said a year ago. We can’t kick the can anymore, and we’re heading toward a period of rapid monetary inflation. The “grandchildren” paying for this debt and spending… are my generation and everyone younger than me. We are paying it through higher housing, auto, education, and energy prices. It’s now. It’s not 20 years from now. It’s now. It’s happening now, and we’d better prepare for the next leg of this problem. Until we knock this off, take our medicine, and fix our deficit spending, expect inflation on the things that matter only to continue. The people in charge do not understand basic economics. And as always, no one is coming to save us. Dear Fellow Expat: What an interesting day. The markets took an absolute gut punch after inflation numbers came in higher than expected. It’s always interesting when I plan a week of education - because something big happens, and I need to address it. I think I did with the above…. so back to our regularly scheduled program. Have you seen the movie A Beautiful Mind? Russell Crowe plays the great mathematician John Nash, a Nobel Laureate in Economics. Nash’s contribution to economics centered on the idea that “cooperation” can deliver improved financial outcomes for the parties involved. The Nash Equilibrium is the basis of Game Theory. Now, I won’t dig too deep into this. But Game Theory dominates an incredible amount of the world. If you’re in business, you want to consider what your competition is doing. In foreign policy, one must consider what a foreign nation might do in reaction to your decisions. And it’s especially critical to the fundamentals of the global oil market. That’s because OPEC is the ultimate player in cooperation… not competition. The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization founded in Baghdad in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. The group aims to streamline petroleum policies among its Member Countries to stabilize oil prices. OPEC has expanded since its founding and now includes 13 member countries in the Middle East, Africa, and South America. OPEC's activities can significantly influence global oil prices by setting production targets for its member countries. Last year, OPEC countries collectively produced about 28 million barrels of crude oil per day. This figure fluctuated due to market demand, geopolitical events, and individual country policies within OPEC. But overall, it represents about 30% of the world's total crude oil production. But they also account for about 80% of the global reserves of crude. The chart below shows how much oil OPEC nations are sitting on today. Venezuela has the most proven crude reserves. However, a socialist idiot runs them, and they lost most of their petroleum engineers. Policy matters. So does the type of government involved. Because of Venezuela’s utter failure in policy, they only produce about 765,000 barrels per day. Here’s the most important thing. OPEC is a cartel… This means they are an association or coalition of producers or suppliers that want to keep prices higher and reduce competition. They cooperate by setting production quotas to ensure that the global oil markets. Different members produce different amounts of crude. Saudi Arabia, for example, produced about 10.5 million barrels per day last year. Iraq is second at about 4.4 million barrels per day. When OPEC meets to discuss policy, they will set quotas for each country. Here’s why this matters. Imagine that a nation produces 10 million barrels daily, and the oil price is $70. Well, simple addition notes that this is $700 million in daily revenue. But what if they reduce the production to 9 million barrels, and the oil price rises due to supply and demand? Let’s say crude prices rise to $80 because of this level of production containment. Well, do the math. This would be $720 million per day. That’s a $20 million surplus… by producing less. This situation explains why OPEC’s price-fixing and cooperation is so important. It’s completely legal. If airlines did this in the U.S. with plane tickets, the executives would be in jail. The cooperation ensures higher prices. Competition might lead to a market flooded by cheap crude. That’s critical because most of these nations finance their social budgets with oil. Higher prices ensure greater harmony among the populace and prevent unrest. On the Demand Side Now, OPEC drives supply. China drives global demand. Yes, the United States accounts for 20% of global demand. But we produce a lot of crude here, can refine products, and largely sustain our demand. The U.S. uses about 19.1 million barrels of crude oil per day. We produce about 11.6 million barrels daily- that number is rising. So, yes, we import a lot. China imports about 11.5 million barrels per day, and its economy’s fluctuations dramatically impact the cost of crude globally. The United States economy hasn’t grown as fast as China’s over the last two decades. China has experienced rapid economic growth over the past few decades, becoming the world's second-largest economy. This growth has driven substantial industrial expansion, urbanization, and an increase in the middle class, all of which contribute to higher energy consumption, including oil. That’s just one factor. China has the largest population of any nation, and its demand for energy is rising. This includes transportation, heating, and industrial use. The sheer volume of consumers and businesses contributes significantly to global oil demand. Then, there’s the fact that China is a critical manufacturing piece of the global economy. It’s a pivotal player in the worldwide supply chain, manufacturing many products for international markets. This industrial activity requires substantial amounts of energy, including oil. Finally, China is paranoid. The nation has been known to build its strategic petroleum reserves when oil prices are low, which can influence global oil demand and prices. I know it’s easy to look at the U.S. and argue that we play such a big role in crude prices. But the U.S. is a large producer of West Texas Intermediate (WTI) crude, which has much less sulfur than Brent crude - the global benchmark. China’s economic growth and its role in the future global economy are the most critical parts of the demand side of the global equation. So, when China sneezes… OPEC catches a cold. These are the two most important players in the global energy markets. When either party announces something, oil prices can move quickly. Today, OPEC Secretary General Haitham Al Ghais emphasized the expected surge in oil demand driven by the needs of growing economies worldwide. As the global community grapples with balancing energy needs and sustainability goals, OPEC's production cut strategy is intended to ensure market stability during volatile times. I argue that investors should “invest” in producers as if WTI crude will remain at $75 per barrel and take advantage of the contrarian view that oil is going nowhere. We’re currently long PBF Energy (PBF) in the Model Portfolio and have an open put spread on Occidental Petroleum (OXY). Tomorrow, we’ll discuss the midstream and one name that can be the cornerstone of your retirement portfolio. Stay positive, Garrett {NAME} Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()