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Post Market Wrap | Brent & Crude Oil Surge Again on Russian Oil Sanctions

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This Post Market Wrap is presented by KOSEC – Kodari Securities

  • Sanctions imposed by US, UK and European Union
  • Commencement date of sanctions not yet set
  • Oil is worth US$600m daily to the Russian economy 
  • Sanctions may impact Russia’s ability to finance the war on Ukraine
  • Australian oil and gas exporters are beneficiaries of Russian oil sanctions

US, UK and EU sanctions announced for Russian oil

This collective decision by the US and its European allies is a major blow to the Russian economy, because Russia is dependent on oil export revenue of around US$600 million a day to finance the cost of war on Ukraine. This estimate is based on Russian oil exports of 5 million barrels a day, at today’s international oil price, and is based on International Energy Agency statistics. The sanctions may be a turning point in the war on Ukraine. Russia is the world’s second largest oil exporter behind Saudi Arabia, which highlights the significance of this concerted action and explains the rapid rise in oil prices over recent days.  

The obvious challenge for the UK and the EU is finding substitutes for Russian oil and gas. Russian natural gas accounts for 40 percent of EU consumption needs and Russian oil for 30 percent of EU consumption. This is not going to be a ‘quick fix ‘and may take a year or longer to implement the industry changes that ensure European energy is available at commercially acceptable prices. Irrespective of industry measures to ensure energy supply to Europe, it is clear that higher energy prices are here for the foreseeable future. The uncertainty has already seen oil spike to US$125 a barrel today and oil futures out to June are sitting at US$116.83 a barrel, up $UDS1.62 on the previous day close. 

Price impact on energy producers

The immediate impact on energy producers for now is positive, given higher oil price prices generate higher margins. However, the question is will the step-up in energy prices bring on an economic downturn and potentially a global recession? Higher energy prices feed into inflation because energy is a key input in the production of consumer goods and delivery of services. This may force the hand of Central Banks around the world to increase interest rates, if high oil prices are sustained for a lengthy period. Rising interest rates have the effect of reducing consumer demand because household disposable income is reduced. However, an economic downturn brought on by falling consumer demand is likely to, over time, lead to a return to lower oil prices. This is a reflection of the old adage that ‘Nothing cures higher prices quicker than higher prices’.       

Image: file

Beneficiaries of higher oil prices

The short to medium-term benefit for Australian energy producers is obvious. Woodside Petroleum, BHP, Santos, Origin Energy and Beach Energy are well-placed to generate higher cash-backed earnings in the years ahead. 

Woodside is Australia’s largest independent oil and gas company and BHP is an international oil and gas explorer and producer, while Origin Energy owns a production portfolio that includes Australia Pacific LNG in the Surat and Bowen basins in Queensland. Santos which recently completed its merger with Oil Search, is on track to supply gas to its world-class Darwin LNG plant for supply into Asian markets. 

 One clear outcome of the oil price hike is the accelerated push for alternative energy sources such as renewable ‘clean energy‘, and battery storage technology. This is in turn driving the price of ‘battery metals‘, like nickel, which today is trading at record price levels.   
In the meantime, Australia’s world class energy producers in Woodside Petroleum, Santos, Origin Energy and BHP, are set to generate strong cash flow and profit over the medium term.

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.

Michael Kodari is one of the world's most consistent, top performing investor. A philanthropist and one of the prominent experts of the financial markets, he has been referred to as ‘the brightest 21st century entrepreneur in wealth management' by CNBC Asia and featured on Forbes. Featured on TV as the "Money Expert", on the weekly Sunday program "Elevator Pitch", he is recognised internationally by governments as he was the guest of honour for the event "Inside China's Future", chosen by the Chinese government from the funds management industry, attended by industry leaders, when they arrived in Sydney Australia, on April 2014. Michael and George Soros were the only two financiers in the world invited and chosen by the Chinese government to provide advice, and their expertise on Chinese government asset allocation offshore. With a strong background in funds management and stockbroking, Michael has worked with some of the most successful investors and consulted to leading financial institutions. He was the youngest person ever to appear on the expert panel for Fox, Sky News Business Channel at the age of 25 where he demonstrated his skillset across a 3 year period forming the most consistent track record and getting all his predictions right over that period. Michael writes for key financial publications, is regularly interviewed by various media and conducts conferences around the world.

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Management shake up at under fire Qantas

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There’s been a management shake up at Australia’s flag carrier airline Qantas, which has come under fire for cancellations and delays

Jetstar CEO and longtime Qantas executive Gareth Evans has resigned.

He was touted as a potential replacement for controversial Qantas CEO Alan Joyce.

Gareth Evans has been with Qantas for 23 years.

He has been chief of Jetstar since 2017, but has worked across the group and has now “decided this is the right moment to move on”.

This comes as the aviation grapples with the higher fuel prices and staffing issues at airports that are affecting much of the industry globally.

Strong demand

Qantas has also updated the market, saying it’s on track to record second half earnings of just over 500 million dollars.

Underlying profit is set to return in FY23, while debt levels are now well below pre-pandemic levels.

Qantas says this is due to continued strong domestic and international travel demand.

Qantas has come under fire for long delays and cancellations
Qantas has come under fire for long delays and cancellations

After peaking at more than $6.4bn at the height of the pandemic, net debt is expected to fall to around $4bn by June 30, an improvement of around $1.5bn in the past six months.

The airline has come under sustained pressure, with many passengers complaining about long queues, cancellations and delays.

Qantas is calling for patience ahead of the winter school break rush as it hires more staff to manage increased demand at airports.

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Nike to fully exit Russia

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U.S. sportswear maker Nike is making a full exit from Russia, three months after suspending its operations there, the company said in an emailed statement Thursday

The sportswear giant had said back in March that it would suspend operations at all the stores it owns or operates there.

On Thursday (June 23) the firm said it would leave the country altogether.

In a statement, Nike said it would scale down over the coming months.

The move is largely symbolic for the company, which gets less than 1% of its revenue from Russia and Ukraine combined.

It says any stores that are still open there are run by independent partners.

In May, Russian media reported that Nike had not renewed agreements with Inventive Retail Group, its largest franchisee there.

Now the full exit lputs Nike in line with other major western brands such as McDonald’s and Google.

Foreign companies seeking to leave face the prospect of new laws being passed that will allow Moscow to seize assets and impose criminal penalties.

That has prompted some businesses to accelerate their departure plans.

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U.S. orders vape company Juul to cease sales

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Juul has been an industry leader in the vaping sphere since its establishment in 2015, controlling 75 per cent of America’s market by its third year of operations.

This is just the latest crackdown on the Tabacco industry by the Biden administration, all part of a sweeping effort to regulate the sector after years of delay.

The White House has also announced a rule to establish a maximum level of nicotine in tobacco products in an attempt to make them less addictive.

After a nearly two-year-long review, the FDA said Juul submitted insufficient and conflicting data to show that its e-cigarettes met public health standards.

The regulator also said the findings raised “significant questions,” including whether potentially harmful chemicals could leach out of Juul pods.

The decision potentially deals a fatal blow to the once high-flying San Francisco company.

Juul did not immediately respond to a Reuters request for comment.

The FDA had to judge whether Juul’s products, which have been sold for years without being officially authorized by the agency, were effective in getting smokers to quit and, if so, whether the benefits to smokers outweighed the potential health risks to new e-cigarette users, including teenagers.

“They prey on children.”

Democratic Senator Dick Durbin hailed the decision by the FDA on Thursday, but said “they’re in for a legal battle for sure.”

Earlier this week, the Biden administration said it also plans to propose a rule establishing a maximum nicotine level in cigarettes and other tobacco products to make them less addictive.

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