Trouble in The Red Sea – It’s Not Just Oil
Got two good eyes, but you still don’t see. A few days ago, CNBC interviewed Chevron CEO Mike Wirth at the Davos World Economic Forum. The obvious intention of the interview was to get a perspective on oil prices from one of the energy industry’s true titans. Not surprisingly, he is surprised that oil prices are so low. Frankly, the Red Sea and the Suez Canal are arguably the single most important trade route and bottleneck for oil globally, so the threat of attack from Yemeni Houthis should have implications to oil pricing and risk. That said, over the last several years, as the US has become a significantly larger producer of oil, the price sensitivity of oil due to unrest in the Middle East has declined materially. However, he does make a good point, this is still an important trade route, and the risks to this route are currently very high. It’s easy to focus on oil because it’s very volatile and we all feel price changes directly when they change. Oil is an important input to so many of the products we use in our daily lives, and as such, we must pay attention when prices change. But oil itself is far from the only reason we should be paying attention to this trade route. Over the last several years, we have seen material disruption in the global supply chain affect pricing and availability of many important items. Whether we’re talking about building materials or semiconductors, globalization has resulted in sensitivities to trade routes that can result in large fluctuations in the inputs that the Federal Reserve uses to calculate inflation. The pain we’ve felt here in the United States had been starting to subside as a result of increased interest rates. In fact, the Fed themselves have said that they believe there is capacity for as many as 3 interest rate CUTS this year.
What is unlikely to have been in the Fed’s calculus, however, was an interruption in 12% of global trade’s logistics and 30% of container traffic. But that is what is at stake in the Red Sea. Maersk and other logistics providers have started to reroute ships around Africa to avoid missiles and other threats in the Red Sea. If this continues long enough, the Fed’s cuts could be in danger. The global supply chain, while academically sensible, can be very fragile. That fragility can have large effects on parts of the economy that wouldn’t be thought of as directly related to globalization. In some cases, a story like this one has direct effect on some of our investments in Government Services, a story like this may appear to be about oil, or some far off land, it is important to ask the question as to how these stories interact with all investments. At Willow Creek, this global view is always part of our analysis because we care about seeing the whole picture and making decisions that are inclusive of all important data.
https://www.cnbc.com/2024/01/16/red-sea-crisis-poses-very-real-risk-to-oil-chevron-ceo-says.html
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