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Markets turned their attention back to the AI theme on Wednesday when four of the Magnificent Seven stocks – Microsoft, Amazon, Alphabet, and Meta Platforms – announced earnings.
Despite big earnings beats overall, the market’s focus remains on their huge capex spending. Will Big Tech be able to convert its estimated $650 billion combined AI spend this upcoming year into profits?
Earnings season has been a welcome distraction after two months of nonstop war coverage. But once earnings season winds down, attention will quickly return to the Middle East…
Today marks one of the biggest structural shifts in the history of the oil market. The United Arab Emirates (UAE) is quitting the Organization of Petroleum Exporting Countries (OPEC) after 58 years of membership.
Not only does that have major ramifications for OPEC, but it has much wider implications for the global economy as well…
One of the major consequences of the Iran conflict has been the soaring oil price. When hostilities broke out, both Brent and West Texas Intermediate (WTI) crude oil burst through the $100 level before topping out around $113.
After a period of consolidation, oil prices have surged again. Both benchmarks are on the cusp of retaking those highs – with clear momentum behind them.
The double blockading of the Strait of Hormuz by Iran and the U.S. is starting to bite. And things are clearly reaching a critical juncture…
Much of the mainstream press coverage has focused on President Trump and the success (or not) of the military campaign. And, of course, the costs of the operation.
However, the conflict has also taken a huge toll on countries in the region – Iran is on its knees. Its currency is tanking, inflation is soaring, and its financial institutions are under extreme pressure, adding to growing social unrest.
With it unable to readily ship oil, it’s just a matter of time before its economy collapses. Even if a deal can be cut, it will likely take decades or longer to recover from the conflict, if Iran recovers at all.
But that’s not the real story in the oil market right now. As I mentioned above, the UAE is leaving OPEC. And the shock announcement will turn the oil market on its head…
Ever since OPEC formed in 1960, Saudi Arabia has been its most dominant force. It effectively dictated the level of crude supply.
But as the cost of the war has taken its toll, it has brought old cracks in OPEC to the surface. None more so than the UAE. While OPEC has traditionally crimped supply to push prices higher, the UAE has invested heavily in its production capacity and would like to put that extra volume to use.
And with oil surging and likely to remain high, the UAE’s exit from OPEC gives it free rein to tap substantial profits by selling that capacity in the market.
The real problem for Saudi Arabia and OPEC more broadly will be if other members want to follow suit. That solidarity (at least on the surface) has been a hallmark of OPEC’s strength and its ability to control prices via supply for decades.
A fractured OPEC will have less influence in the global oil market…
That’s why this move from the UAE matters so much right now. OPEC is losing a key player as Iran’s supply is withdrawn from the market. That’s going to generate substantial instability ahead.
Not only will that instability feed into inflation and interest rates, but it will also impact currencies and the global economy…
Once the noise around earnings fades, markets will have to face that the Middle East conflict isn’t just about oil. It also has major implications for the global economy that will inevitably flow through to stocks…
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
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