US Doing What it Can to Counteract High Gasoline Prices
High gasoline prices continue to plague efforts to lower inflation worldwide. The Russian invasion of Ukraine and the resulting sanctions prohibiting purchases of Russian oil substantially exacerbate tightness in world crude oil and petroleum product markets. As discussed below, markets dynamics foretold worldwide crude oil demand outpacing supply months before Putin’s ill-conceived attack. The Russia-Ukraine war and resulting market changes, however, wreaked such havoc on world markets that the US exported approximately 1.1 million barrels per day (Mmbpd) of crude oil and petroleum products on average over the past four weeks versus importing 343,000 barrels per day over the same four-week period a year ago. This ~1.5 Mmbpd swing to exports from imports represents a $20 per barrel to $30 per barrel swing in crude oil prices.
As shown in the following chart from the US Energy Information Administration, domestic crude oil inventories commenced declining rapidly in Spring 2021 (red circle). The prior six-week period, which saw significant additions to inventories of crude oil, marked the typical period of seasonal refinery maintenance when facilities shutdown and throughputs decline precipitously.
The graph below of US crude oil production exhibits a dip in flows from wells concurrent with refinery shut-in season, but with a corresponding rebound in production from 10.4 million barrels of oil per day (Mmbopd) in late March 2021 to well over 11.0 Mmbopd by July 2021. Production growth persisted until Fall 2021 when Hurricane Ida hit the Gulf Coast the final week of August, resulting in flooding and shut-in crude oil production. Unfortunately, demand growth persisted and crude oil inventories failed to recover through Winter 2021-2022, as shown in the above graph.
Refineries, in order to meet burgeoning worldwide demand for gasoline, diesel, and petroleum products, only completed an amended turnaround in Fall 2021, as highlighted by the yellow circle in the following chart, negatively impacted by Hurricane Ida. As previously noted, this short turnaround for refiners offered no relief for the ongoing draws on crude oil production and inventories. This situation led to the initial increase in crude oil prices from the pre-Hurricane Ida $67 per barrel level to the $85 per barrel level in late-2021. Economically motivated, domestic US crude oil producers increased production year-over-year in 4Q21 to over 11.6 Mmbopd from 10.9 Mmbopd in late 2020. As shown in the above graph, these producers continued to increase production, albeit more ratably and conservatively than in earlier $100+ per barrel price regimes, to a recent 12.0 Mmbopd. Notably, oil drillers and oilfield services companies remained constricted by the same supply chain logistics snafus and lack of workers that complicated operations for much of the rest of the US.
Politicians and the popular press made much of declining refining capacity in the US. However, the above chart shows that refining capacity, again in response to high petroleum product prices, ran between 15 million barrels per day (Mmbpd) and 16 Mmbpd of throughput the entirety of the past 15 months, significantly higher than it ran over the prior year. Primarily in response to expectations for declining petroleum product demand, significantly higher expectations for alternative fuels and electric vehicles, and increased maintenance expenses, refinery throughput declined 8.6%, or 1.6 Mmbopd, from a peak of 18.0 Mmbopd in August 2018 to a recent 16.4 Mmbopd.
Very robust growth in gasoline and diesel demand brought on by the re-opening from COVID-related shutdowns, as shown in the graph above, combined with already very low crude oil inventories and long-term declines in refinery capacity provided a solid set-up for escalating crude oil and petroleum product prices months before Russia invaded Ukraine. With OPEC recenty producing 2.6 Mmbopd below its production goal in April and diminished spare production capacity, we do not see any quick fixes on the horizon other than conservation for high crude oil, gasoline, and diesel prices. In response to this opinion Solyco Wealth remains overweight the Energy sector, holding TotalEnergy, Schlumberger, Pioneer Natural Resources, Marathon Petroleum, and Earthstone Energy in its model portfolios.
While the 2022 downdraft for risk assets accelerated in 2Q22, the four model portfolios managed by Solyco Wealth remained, after fees, ahead of their benchmarks and the S&P 500 for seven of eight observations year-to-date (YTD) and since inception (SI). Year-to-date only the Conservative Model Portfolio, after a 0.50% fee, lagged its benchmark, doing so by 32 basis points (bps), or 0.32%. Performance after fees for all four portfolios– Conservative, Moderate, Moderately Aggressive, and Aggressive – exceeded that of the S&P 500 YTD led by the Moderately Aggressive Model Portfolio outdistancing the index by 809 bps, or 8.09%.
Tomorrow marks the rebalancing of the Russell Indices on which many domestic equity market participants base their sector weightings, stock selections, and overall portfolio exposures. Given not only the overall turmoil in equity markets to start 2022 but also the major drivers of this disruption, this rebalancing season probably will result in some highly peculiar trading activity to say the least. 
A bear market for the benchmark S&P 500 came out of hibernation Monday (6/13) as the index breached the 20% loss level from its previous high January 3, 2022. Bear market conditions did not hibernate as long as usual this go around as only 22 months passed since the March 23, 2020, end of the prior, COVID-induced bear market, which only lasted a little longer than a month. This marked the shortest span between two bear markets since at least the Great Depression, as shown in the following table from S&P. 
Too much money chasing too few goods and services: inflation. Inflation is not a difficult concept to describe or to understand. Little Jill has an extra stick of gum that Jack would like to buy for a nickel. All looks good for Jack to enjoy a stick of gum until Billy, who also would like a stick of gum, arrives with a nickel and a penny he found on his walk over. Jill, ever the rational seller, agrees to sell Billy her last stick of gum for $0.06. Voilà, the Jill-Jack-Billy market for gum just experienced 20% price inflation.
Dollar-cost averaging provides investors a tool with which they may use volatility to their advantage. Properly employed, the process offers benefits for buyers and sellers of traded assets ranging from stocks to bonds, cryptocurrencies, sports bets, and collectibles. Trading costs, both in terms of effort and commissions, mark drawbacks to the method.
Adages, aphorisms, sayings, and such gain popularity because they so often prove to be correct. A handful of my favorites:
The Although temperatures in many parts of the US recently felt summer-like, several weeks of spring remain. Consumer price inflation and asset market volatilities probably make those temps feel even hotter. These phenomena may have resulted in relatively large changes in incomes, expenses, as well as the sources of these incomes and expenses. As such, for many of us the next few weeks before summer and, hopefully, vacations arrive, may prove fruitful for midyear financial plan reviews.
The Raise your hand if your sick and tired of hearing about inflation. Yeah, me too. I raised my hand and I’m sitting in a room, by myself.
The 2022 wreck in Tech stocks, which declined ~19.8% as measured by the price change in Vanguard’s IT Index Fund (VGT), took a short reprieve yesterday (4/25/22). More share price pummeling commenced today (4/26/22), however, as one can see in the Yahoo! Finance chart below.
