Risk assets were out of favour last week. The two major factors that forced investors to be careful and pragmatic may still have a long-lasting effect on both equities and the oil balance and, as such, on the formation of oil prices. Despite Friday’s reversal, global and US equities finished the week lower because confidence in US rate cuts next month has taken a hit due to tepid labour market data. Oil prices also fell sharply. The latest US attempt to broker a long-lasting peace agreement between Russia and Ukraine raised expectations of a sizeable increase in oil supply. In the shadow of these developments, the 30th Conference of the Parties ended in Belém, Brazil, without a direct reference to fossil fuels. It will be a worthy topic for another report. As for the more pressing concerns, we begin with the proposed Ukrainian peace deal.

It is a Complete Mess

The first reports of a newly drafted proposal surfaced late Wednesday and were touched upon in recent notes. The situation, nonetheless, is fluid, to say the least; therefore, regular updates are absolutely imperative to comprehend the potential and far-reaching consequences of ending the nearly four-year war in the heart of Europe. The market reaction to the initial news was telling. Oil prices dropped. WTI, Brent and Heating Oil all lost around 3% last week, with RBOB plummeting twice as much. Curiously, however, the crude oil structure on the front end actually strengthened. The M1/M7 Brent spread also remained stable, and its CME cousin only lost a few cents over the week due to the WTI expiry on Thursday. The CME Heating Oil crack spread edged $1/bbl lower week-on-week, but the loss between Wednesday and Friday exceeded $7/bbl. It is a clear sign that the most affected part of the barrel by a plausible peace agreement would be in the middle.

Interpretation of the draft, allegedly drawn up by the US and Russia over the past few months, has changed considerably since Thursday. Three or four days ago, it resembled an ultimatum, especially after US Army Secretary Dan Driscoll, during meetings with Ukrainian officials in Kyiv and following President Trump’s comments that Ukraine “has to like the deal”, stated that the US was not negotiating details and that “we need to get this shit done”. After the world’s strongest military and economic power issues such a threat, the Ukrainian leadership would understandably view accepting or refusing the proposal as an existential choice.

The reversal came late Saturday. It may have been triggered by the gumption shown by Ukraine’s Western allies, who publicly pushed back on the proposal and stated in a joint declaration during the G20 summit in South Africa that it would require additional work. Marco Rubio, the US Secretary of State, then sought to distance himself from the 28-point proposal, while one of his Republican colleagues, Mike Rounds, said, “It is not our recommendation. It is not our peace plan”. An independent US senator simply labelled it a Russian wish list. Although the President initially gave Ukraine an ultimatum to accept the deal by Thanksgiving, he later backtracked, saying it was not the “final offer”. US-Ukrainian talks to resolve the differences are held in Geneva, with details sketchy.

The original draft bears all the hallmarks of the capricious policymaking of the incumbent US administration. It was put together hastily; most parts are vague; it is transactional; 275 words are devoted to business deals, part of which declares that $100 billion in frozen Russian funds held in Europe would be invested in rebuilding Ukraine, led by the US, with 50% of the profit demanded by Washington. It ostensibly guarantees Ukraine’s sovereignty in just five words, yet would force Kyiv to accept unacceptable territorial concessions and prohibit it from joining NATO. It follows several U-turns by the US President, who first expressed admiration for his Russian counterpart, only to later accuse him of letting him down, followed by a plan that would effectively amount to Ukraine’s capitulation and the end of its existence as a sovereign state. Experts in behavioural economics, who study how biases and emotions influence the economic decision-making of individuals and institutions, might consider expanding their work to the field of politics. It is a goldmine.

It is too early to conclude whether the peace plan, in its current form, will be forced upon Ukraine, the EU, and NATO, and it is also unclear, albeit possible, that rifts within the US administration, Republicans and the MAGA movement will widen due to the lack of a coherent foreign policy. What does seem certain is that if Russia gets what it wants, it will feel emboldened to pursue additional territorial gains, not just in Ukraine. The US will further isolate itself, as its alliance with the world’s biggest single market, the EU, might suffer irreparable damage. These are troubling times, probably the most disturbing since the start of the second Trump Administration, and, as things stand, ending the war is not imminent.

Nvidia to the Rescue? Too Early to Say

Equity investors, in the meantime, had their own concerns to deal with. After the seemingly unstoppable advance since Liberation Day, the S&P 500 Index lost 4% of its value and the Nasdaq 7% from their October peaks, with last week’s losses amounting to 3.9% and 2.7% respectively. Wall Street’s “fear gauge” is above the pivotal 20 level. The extent and speed of the rally, predominantly driven by the AI craze, were never going to be sustainable, but the question is whether last week’s dip marks the beginning of a reassessment of tech-sector valuations or is it just an ephemeral correction.

The world’s most valuable company, Nvidia, beat expectations when releasing its latest earnings report, and its CEO plainly stated that demand for its flagship product is “off the charts”. Yet its share price, along with those of other tech companies, plunged last week as debt issuance clearly worries investors.

A turbulent week ended on a positive note, as there is renewed anticipation that the Federal Reserve will, after all, lower the cost of borrowing in December. The CME FedWatch tool now assigns a 70% probability to a rate cut, up from 39% on Thursday. However, given the Fed’s dual mandate of reining in inflation (consumer prices rose by 3% two months ago, well above the 2% target) and maintaining full employment (the jobless rate ticked up to 4.4% despite an impressive 119,000 jobs created in September), the jury is very much out on the central bank’s next move. With uncertainty here and unpredictability there, both oil supply and demand estimates are subject to unforeseen revisions; the former is possibly more prone to amendments than the latter.
 

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