Oil finds a way, Nvidia keeps the story alive
A quiet week with two things in it that matter: more oil is getting out of the Gulf than the blockade models allowed for, and Nvidia’s numbers say the AI build-out is still accelerating.
First published in Noise Cancelling
As the summer holiday season ends, not surprisingly, this has been a relatively subdued week. Financial markets have been generally quiet and, aside from the US Treasury Secretary’s “Operation Economic Outcast” plan in relation to Iran, geopolitics has been in holiday mode.
Against this muted backdrop, some interesting announcements stood out: oil and gas flows through the Strait of Hormuz, which appear to have affected oil prices, and Nvidia’s results on Wednesday.
Finally, I am writing this update ahead of the Fed chairman’s much-anticipated speech at the Jackson Hole Economic Symposium later today, and so will update you on that in next week’s edition.
More sanctions, and the limits of them
On Monday Scott Bessent announced just over 60 new economic sanctions on Iran, adding to the more than 1,000 existing measures. Whilst this new list will add to the economic pressure on Iran, which was reflected in further falls in the Iranian rial’s black market price against the dollar this week, as long as China continues to support the regime (it has traditionally bought over 90% of Iranian oil exports) it is highly unlikely that they will result, at least in the short term, in any form of reappraisal of Iran’s position.
It will be interesting if this subject emerges as a contentious issue at the Trump-Xi summit next month in the US, but I don’t expect it to lead to the US sanctioning Chinese financial institutions, which would of course risk a broader breakdown in the relationship between the two superpowers and pose major problems for financial markets.
The oil is getting through
Relatedly, there were some interesting reports from the Gulf states this week about the amount of oil and gas that is finding a way through the Strait of Hormuz choke point. Earlier in the week, Bloomberg published a story suggesting that Kuwait and Qatar are sending more crude through the Strait, such that the two countries have managed to get shipments back to 70% of the pre-conflict levels. The article also suggested that around 7-8 million barrels of oil a day are now exiting the Persian Gulf via this route. (Prior to the conflict, 20-21mn bpd of crude oil, condensate and refined products exited through this route.)
Interestingly, the article went on to suggest that this (7-8mn bpd) was about 75% of pre-war levels. It also added that Vortexa, a UK-based market intelligence company focused on global energy and freight markets, had suggested that the seven-day average of oil flows through the waterway was close to 10mn bpd.
When you add these volumes to the oil bypassing the Strait via pipelines in the UAE and Saudi Arabia, it is clear why pressure on crude prices eased this week. I first wrote about this a few weeks ago, but once again it appears as if the point of maximum Iranian leverage on global energy markets has passed. If this trend continues I would expect oil prices to remain well below recent distressed peak levels, easing pressure on inflation across the world.
Nvidia, and the numbers that keep being upgraded
Nvidia’s results, released midweek, attracted the attention a $5.5trn company deserves. (The entire UK stock market’s market value is $5.9trn.)
Importantly, Q2 results beat expectations on both revenue and net earnings, and, crucially, medium-term guidance also beat expectations, with a forecast of 70% revenue growth in 2028.
Apart from the fact that this sort of growth is astonishing for a $5.5trn company, it also reassured investors that the AI industrial revolution was alive and kicking and, if anything, gaining momentum. Although expectations for Nvidia remain elevated, these results pleased the market, and the shares rose on the day.
Clearly there are growing concerns about the level of expectation now embedded in the share prices of businesses exposed to AI, and indeed about whether future returns will ever justify the giant levels of investment in AI infrastructure, but for the time being this particular industrial revolution seems to be gathering pace, and is best reflected in the following chart:
One cautionary observation I would make about this astonishing chart, though, is that the rate of change in hyperscaler capex is forecast to slow significantly after next year. That slowdown in the rate of growth of investment, if it happens, will I believe be an interesting obstacle for this increasingly dominant industry to navigate.
The water myth
Whilst on the subject of hyperscaler capex, I thought I might use this opportunity to show a chart which I think contextualises, possibly undermines, one of the popular myths confronting this sector. It concerns datacentre water usage, for cooling, which has been used across the US by politicians as a stick with which to bash the industry.
Data centre water use is a rounding error compared to almond production.
Perhaps some of the golf-playing, almond-milk-drinking politicians who have jumped on this particular bandwagon in recent months might be well served by paying attention to the facts.
What to look out for next week
I will report back on the central bankers’ Jackson Hole jamboree next week. Aside from that there is not that much going on, apart from UK house price and mortgage approval data, a speech from Andrew Bailey, and a lot of labour market and wage data from the US. The corporate calendar, thankfully, is also very quiet.
Important information
The views expressed in this article are those of the author at the date of publication and not necessarily those of Curated Capital Ltd. The contents of this article are not intended as investment advice and will not be updated after publication unless otherwise stated.
