AI and data center stocks have been falling, right when the oil price was actually going up
Correlation does not mean causation.
But in this case, there actually is causation.
At first, I did not realize why. So I did some digging.
Oil prices have been rising, and they’ve been rising fast. The closure of the straight of Hormuz has led to increased volatility in a lot of commodities. Oil, gas, fertilizers. All are on the rise.
But how does that actually affect AI and Chip stocks?
A lot of AI and chip companies have a seen increased volatility since the Iran-conflict began.
This was also noticeable today
TSMC was down 5%
AMD was down 3.5%
SK Hynix was down 3%
ASML was down 1.5%
Nvidia was down 1.5%
You get it.
The reason for this volatility and price pressure?
It’s actually a bit of a cascading effect. Oil prices don’t have a direct effect on datacenters or foundries.
But, higher oil prices tend to lead to higher energy prices across the board.
Let me explain.
While oil is not the primary source of electricity generation, it’s price does tend to affect the whole energy market. Gas and oil are usually quite heavily correlated.
LNG prices have been rising as well.
The main problem here: Asia’s access to Middle-Eastern LNG is cut off. LNG facilities in Qatar have shut down, directly impacting global supply.
That means that Asian countries have to to source it elsewhere.
In doing so, they are directly competing with Europe, which is also highly dependent on importing LNG, mainly from the US.
This leads to higher prices, as the LNG market is a global one.
Higher oil —> Higher gas —> Higher power prices.
Many power plants still burn fuel oil or diesel to generate electricity. This is especially notable during peak hours, when demand for electricity is high.
But that’s not the biggest factor.
When oil prices rise, industries tend to switch to natural gas to save money. This jump in demand for gas drives its price up too. Since natural gas is a primary fuel for the majority of the world's electricity generation, higher gas prices almost instantly mean higher electricity prices as well.
Due to strong investment in renewables, the impact is less strong than it would have been a few years ago.
So I guess that’s a good thing.
As datacenters are very power-hungry, they’ll suffer from these higher prices.
Short-term effects can be absorbed by the hyperscalers. But not forever.
If electricity prices were to rise even further, and remain elevated, hyperscalers might decide to slow down the pace of the AI datacenter buildout.
Higher energy costs could really slow down the AI infrastructure buildout. Especially fabs in Taiwan and Korea could face high energy costs.
Foundries like TSMC could be affected as well. TSMC alone accounts for about 9% of Taiwan’s total electricity consumption, so it’s inevitable they will take a hit.
TSMC stated they are not worried for now, but sustained energy higher costs, will impact them.
Operating costs for chip fabs and data center will increase. Estimates are that energy expenses account for roughly 3% to 6% of projected 2025 revenue for TSMC, Samsung, and SK Hynix. So while not extremely high, it does influence their profitability.
Usually these foundries are able to pass-through these costs, but unstable energy supply could still affect production efficiency and capacity planning.
But that’s not all.
The datacenter buildout has another major vulnerability: materials.
Qatar is the main supplier of Helium, which is a by-product of LNG production. Helium is essential for maintaining optimal conditions during various stages of production.
Helium is seven times less dense than air. By swapping air for helium, drive manufacturers can achieve a few critical things:
Less Friction —> less power needed
More Platters —> You can fit 9 or 10 platters in a helium drive where you could only fit 5 or 6 in an air drive
Less vibration —> Less turbulence means less vibration, which leads to better long-term reliability.
Another risk, albeit a smaller is Bromine. Bromine is used in semiconductor etching processes to remove unnecessary materials, while high-purity hydrogen bromine is specifically used for polysilicon etching in DRAM and NAND flash production.
If any of these materials would become seriously supply-constrained, it could ripple down to affect the supply of chips as well.
So, should you be worried and sell it all?
No not at all, but don’t close your eyes for these ‘‘hidden effects’’ of the closure of the Strait of Hormuz.
Good night!
TacticzHazel