Weekly summary 23/11

There have been quite a few interesting events to analyze this week, and below I list the most noteworthy news. Let’s get started:

• The euro dropped to a two-year low, while the dollar continued to strengthen following mixed business activity data from various regions. The eurozone’s preliminary composite PMI plummeted to 48.1 in November, its lowest level in ten months and below the 50-point threshold that separates expansion from contraction. In the UK, the PMI also fell, reaching 49.9 compared to October’s 51.8. This contraction, the first in over a year, reflects an economic slowdown exacerbated by the British government’s plan to raise corporate taxes. In sharp contrast, the U.S. composite PMI rose to 55.3 in November, its highest level since April 2022, driven primarily by the services sector, which offset persistent weakness in manufacturing.

  The data from Europe is clearly troubling, as the region, weighed down by poor energy and fiscal policies, continues to struggle. Markets are already anticipating 150 basis points in rate cuts by the ECB for 2025, which would place additional pressure on the EURUSD pair, potentially dragging it below parity.

  

   

  This development brings the Dollar Milkshake Theory back into focus. The theory posits that the U.S. dollar, as the global reserve currency, acts as a financial magnet, attracting capital to the U.S., driving its appreciation, and creating a global liquidity vacuum.

  One of the pillars of this theory is the interest rate differential. The U.S. offers higher rates compared to other major economies, making the dollar an attractive destination for investors seeking higher returns. This capital flow increases demand for the USD, further strengthening its value. Additionally, the perception of stability and security associated with the dollar positions it as the ultimate safe-haven asset during times of global economic uncertainty. This creates a virtuous cycle: in times of crisis, investors flock to the dollar, boosting its value, which in turn attracts even more capital.

  International companies and investors require dollars to operate in the U.S. market, amplifying demand for the currency. In periods of global economic imbalances, this privileged position allows the USD to maintain its hegemony, even in an environment of increasing competition.

  However, this dynamic is not without significant implications for global financial markets. The higher demand for the dollar and its consequent strengthening make imports cheaper for American consumers but raise the cost of exports, affecting the international competitiveness of U.S. companies (exactly the opposite of what Trump wants). At the same time, sustained dollar appreciation can destabilize other economies, especially those with dollar-denominated debt, which face increased financial burdens. This creates an imbalance that penalizes emerging markets and commodity-exporting countries, whose prices often drop in the face of a strong dollar.

  In the markets, the attraction to dollar-denominated assets, such as stocks, bonds, and real estate, can inflate their valuations, benefiting investors who already hold these assets. However, this preference for the USD also creates global volatility, as capital flows to the U.S. at the expense of other regions, causing abrupt fluctuations in exchange rates and asset prices in emerging markets.

  Exactly what we’re witnessing.

  

   

• Ukraine has carried out an ATACMS missile attack, supplied by the United States, on Russian territory, marking a new turning point in the conflict.

  The attack, aimed at a military installation in the Bryansk region, has been portrayed by Moscow as partially contained, claiming its defense systems intercepted five out of six missiles launched, although one struck an ammunition depot, causing a minor fire. Ukraine, however, asserts that the attack triggered significant secondary explosions at the target.

  The outgoing administration of Joe Biden authorized the use of these long-range missiles—the most advanced delivered to Ukraine to date—a move Russia considers a direct escalation that could implicate the United States as an active party in the conflict. In response, the Kremlin has hardened its stance, announcing an update to its nuclear doctrine that lowers the threshold for the use of atomic weapons in cases of threats to its territorial integrity. This move was criticized by President Zelensky, who described it as a sign that Moscow has no interest in pursuing peace.

  The attack coincides with the 1,000th day of the war, a conflict that has left a fifth of Ukrainian territory under Russian occupation and millions displaced. While Ukraine attempts to use tactical advances, such as the capture of an enclave in Russia’s Kursk region, as leverage for future negotiations, the enhanced offensive capability offered by the ATACMS missiles may not be sufficient to significantly alter the course of the conflict, given the time it has taken to implement them.

  On the diplomatic front, the context is shaped by the potential return of Donald Trump to power in the United States. His promise to swiftly resolve the conflict has sparked speculation, though without concrete details, on how this might influence the positions of both sides. Meanwhile, the war continues to escalate: Russia is fortifying its lines in Kursk with the presence of North Korean troops, while Ukraine grapples with the impact of renewed bombardments on its energy infrastructure.

  Uncertainty dominates the horizon. Kyiv insists on the complete withdrawal of Russian forces and security guarantees equivalent to NATO membership, while Moscow demands recognition of its annexations and Ukraine’s renunciation of its Western aspirations. With both sides entrenched in their positions and human losses reaching into the hundreds of thousands, the conflict seems far from resolution, as winter and international pressure add new layers of complexity to an already critical situation.

• The resurgence of deepwater exploration is heralding a new era in the oil industry, driven by several factors. On one hand, the explosive growth of U.S. shale has lost momentum, while Russia’s invasion of Ukraine has driven up oil prices, incentivizing companies to seek new sources. Moreover, governments prioritizing energy security over climate goals have paved the way for major oil companies to ramp up investments in long-term projects, spanning from the Gulf of Mexico to emerging frontiers in Guyana, Brazil, and Namibia.

  From an economic perspective, deepwater exploration is not without controversy. While these operations represent one of the most promising sources of growth outside OPEC by the decade’s end, critics like Carbon Tracker warn that such investments could become stranded assets if the energy transition progresses faster than anticipated. Questions remain about whether the industry will bear the costs of decommissioning platforms and equipment, and the risk of these infrastructures becoming obsolete prematurely raises terminal value concerns, influencing CAPEX commitments.

  The reality is that global oil demand is expected to remain stable over the next decade, while production declines at a rate of 4-5% annually—reaching up to 8% for deepwater projects—making continued investment essential to prevent a supply collapse and a sharp spike in prices.

• This week has made it clear that the corporate race for Bitcoin is heating up. MicroStrategy has acquired another 51,780 BTC for a total of $4.6 billion, reaffirming its position as the leader in accumulating this asset. Meanwhile, MARA has announced a $700 million convertible issuance aimed at increasing its Bitcoin reserves.

  On the other hand, Semler Scientific, a comparatively smaller company, has raised $21 million through an at-the-market (ATM) program and acquired 215 BTC. Metaplanet is also joining this frenzy with a debt offering of 1.75 billion yen exclusively intended to purchase more Bitcoin.

  The landscape shows increasing competition among companies to accumulate Bitcoin, a clear sign that the institutional narrative surrounding the asset is gaining significant traction. ETF flows validate this perception, with $3.35 billion in net inflows over the week (compared to 315 million in newly mined BTC).

  

   

  If we look at the cumulative data over months, eliminating the daily noise, the picture becomes clear, and its implications should be as well.

  

   

• This week, the EIA inventory data (+0.54Mb of crude, -0.14Mb at Cushing, +2Mb/d of gasoline, and -0.11Mb of distillates) went largely unnoticed amid a flood of data with implications for the future market balance forecast.

  The November IEA report highlights a significant disconnect between theoretical supply and demand balances and what is actually happening in the oil market. According to the agency, Q3 2024 was expected to close with a global inventory build of 400,000 barrels per day (bbl/d). However, observable data tells a completely different story: inventories contracted at a rate of 1.2 million bbl/d—a discrepancy that triples the IEA model estimates. This gap, known as the “missing barrels,” reflects a systematic error in the agency’s projections.

  What’s most alarming is not just the magnitude of the error but its persistence. At the beginning of 2024, the IEA forecasted builds of 1 million bbl/d for each of the last three quarters of the year. Now, with the data in hand, we know those inventories never materialized. This massive miscalculation has gone virtually unnoticed, but its implications are profound.

  In Q4, we are likely to see a repeat of this trend, adding more missing barrels to the global balance. If the IEA is underestimating demand or overestimating supply to this extent, real-world data will continue to depict a much tighter picture than consensus expectations. This implies that the current supply deficit will carry over into 2025, significantly reducing the projected inventory surpluses for that year.

  

   

  This deficit carry-over could slash the IEA’s projected builds by up to 500,000 b/d, effectively eliminating most of the increases expected for 2025.

  Vitol, one of the largest commodity traders in the world, has shared its outlook on the oil market for the coming years. Since its sole interest is monetary and commercial, its perspective is often one of the most realistic. Vitol forecasts demand growth through 2030 and beyond, driven by the petrochemical sector and hindered by mobility (gasoline, diesel…), which seems fairly reasonable. Investors often assume that oil demand depends solely on transportation, overlooking other components that are expected to enjoy significant tailwinds in the coming years.

  

   

  With these short- and long-term perspectives, Goldman Sachs has released its oil price forecast, projecting a range of $70/b-$85/b for 2025, though with much more upside optionality than downside. In my opinion, by 2025 the range should skew higher (to $80/b-$90/b), but the long-term price potential is underestimated.

  

   

  On the political front, positive news is also beginning to emerge. Trump has appointed Chris Wright, a veteran of the oil industry, as the new Secretary of Energy. From now on, the contrast between Europe and the United States, as discussed in the first article of this publication, is likely to widen even further and at a faster pace, with pragmatism sharply diverging between the two regions. In the coming weeks, we will delve deeper into the implications of this appointment, but in the meantime, here is a ten-point manifesto recently published by Chris Wright himself:

  1. Energy is essential to life, and the world needs more of it!

  2. The modern world today is powered by and built with hydrocarbons.

  3. Hydrocarbons are essential to improving the wealth, health, and life opportunities of the seven billion less-energized people who aspire to join the world’s privileged one billion.

  4. Hydrocarbons supply more than 80% of global energy and thousands of critical materials and products.

  5. The U.S. Shale Revolution transformed energy markets, energy security, and geopolitics.

  6. Global demand for oil, natural gas, and coal is at record levels and continues to rise: no real energy transition has begun.

  7. Modern alternatives, like solar and wind, cover only part of electricity demand and do not replace the most critical uses of hydrocarbons. Dense, reliable nuclear energy could have a greater impact.

  8. Making energy more expensive or less reliable endangers people, national security, and the environment.

  9. Climate change is a global challenge, but it is far from being the greatest threat to human life.

  10. Eradicating energy poverty by 2050 is a superior goal to Net Zero 2050.

  Amen.