June 26, 2023  |  2 MIN READ

Weekly Market Update

Market Snaps Winning Streak

What happened last week?

  • The S&P 500 fell 1.39%
  • The Dow Jones fell 1.67%
  • The Nasdaq composite decreased by 1.44%

This week, the market will see consumer confidence and sentiment data, along with the final read on Q1 GDP. We will continue to monitor the initial jobless claims data reported each Thursday. It has generally been inching higher since September 2022. The Core PCE measure of inflation the Fed likes to watch is out Friday and expected to be 4.7% year-over-year.

In commodities, OPEC+ has been pro-active in reducing its supply to create a floor for oil prices, an act that also benefits the outlook for energy.

3 Things to Know

OPEC+: Thinking Ahead? OPEC’s Gift to Energy Producers

Normally, signs of a recession would show up in the energy patch, but you won’t find them looking at many Western energy firms today.

In the US, crude oil output is gradually moving toward record highs. To help replace Russian gas supplies to Europe, US liquified natural gas (LNG) exports surged 45% above their pre-Covid level. The world still relies on 6 million barrels per day of Russian crude oil exports, even if many western economies refuse to buy their exports.

The US Strategic Petroleum Reserve has fallen 38% from end-2021 levels, prior to the war in Ukraine, and the US is buying oil again.

Amidst all this turmoil, the global price of oil has dropped by 12% since OPEC+ announced its first round of production cuts in April (-1.66 million b/d). OPEC+ has effectively reduced output by about 3% through cuts announced in October 2022, April 2023 and again in June.

During prior recessions, OPEC+ typically cut production when demand was falling. Production cuts were usually a sign of weakness. However, today OPEC+ is being proactive, reducing output early in an effort to keep the terminal price of oil higher as this rolling recession unfolds.

We are not expecting a new energy cycle and renewed equity appreciation for many energy companies. Citi Research’s commodities team see sustained two-sided risks for commodities prices. This includes the important fact that petroleum and gas supplies typically rise in a lagged response to sustained demand surges. As the historical record demonstrates, the cure for high prices is high prices.

Higher recessionary pricing and the geopolitical necessity of maintaining adequate energy supplies are accelerating the value and profitability of alternative energy.

Improvements in the economics of renewables is accelerating. Even in the relatively energy-rich US, electric heat pump installations are growing rapidly. US electric passenger vehicle sales grew by 65%, compared with a 14% decline for those with internal combustion engines.

The American electric vehicle stock — at 2.4% of registered vehicles — is no longer trivial when considering future US energy demand.

There’s no denying security risks to traditional energy. However, during the transition, the world needs redundant energy supplies from every source possible and this raises intermediate return prospects for non-OPEC producers such as Brazil.

A Round of Consolidation that will Accelerate the Energy Transition

There is an increasing likelihood that emerging clean tech companies will face their first non-Covid recession at a profitable stage. Technological improvements, rising demand and a relatively high oil price suggest greater profit performance from the strongest alternative energy firms and their suppliers over the coming years.

In this emerging environment, selectivity becomes key. Businesses with a valuable product or intellectual property asset — but no good way of executing on it — may be absorbed by entities with access to capital and strong execution capabilities.

Such consolidation may create opportunities, so we see selective asset choice as essential to pick firms with a better chance of emerging from any shakeout as winners. If this sort of rationalization does occur in the industry, it’s likely the clean tech segment will end up bigger, but with fewer firms.

bulb icon What does this mean for investors?

Investors should consider focusing on firms that are cash-flow positive, with strong balance sheets and have the resources to weather the recession and have cash to spend on smaller entities with potential. For example, battery, metals and other established companies may be an alternative to startups and cash flow negative enterprises with high rates in a slowing economy. In the electric vehicle space, larger players are focusing on vertical integration.

Citi Global Wealth Investments
Charlie Reinhard - Head of North America Investment Strategy
Lorraine Schmitt - North America Investment Strategy

See our weekly CIO Strategy Bulletin for more details