Some of the main drivers of the current energy challenge relate to resources, energy market dynamics, and sustainability. First, the physical resources of the Earth are finite, a generally closed system, with the exception of renewable resources. Second, we need to provide more energy in the future, about 50% more until 2050. Three, about 82% of the primary energy Energy demand is obtained from fossil fuels. Finally, the decarbonization campaign collides with the realm of physical energy today. (I’ll save geopolitics for another day.) This breaks down like this:
The story of oil supply shortages is a major concern to me, as are the revised oil barrels due to sanctions against Russia, and Iranian factors as well. OPEC (and the producing world) lacks spare capacity; The effect of underinvestment residuals in the last number of years in the equation. The newly announced The cut of 2 million barrels per day, imposed until December 2023, is supposed to translate to 800,000 barrels per day, largely from the supply of Saudi Arabia and the United Arab Emirates. Two things happen. The first, the effect of the increased price, which appeared in the two trading days following the announcement, provides OPEC + with a more stable incremental revenue stream in the short term, before any recessionary effects. It’s an anti-volatility measure in a very volatile world. It protects the spare capacity by means of the rear supply throttling.
Russia gets the bonus of higher prices. According to an oil trader, there are several million barrels of oil per day discounted and arbitrage on the global market, seeing their way through the front and back doors of Europe, the Middle East and/or Asian ports. This was artificially making prices below $90, hurting the real “market”. Details of narrow width are prevalent in the market – they should not be bet on.
This isn’t an entirely demand-driven cut, as suggested, due to recession fears. Smart investors suggest to me that oil demand is steady; There is a “secular” demand ground. As a seasoned, experienced oilman told me recently, “You shouldn’t bet on the market.”
While he is familiar with the story of the rise in oil prices and related stocks such as Matador (MTDR), Devon (DVN), Occidental Petroleum (OXYand Pioneer Natural Resources (PXD), there is a narrow overlay. Oxy has received some positive price impact from purchases of Berkshire Hathaway stock (BRK.A) (BRK.B). Based on fundamentals that don’t change, I don’t see any reason other than the Buffett effect benefiting Oxy’s stock price. If you can’t bet against the market, Buffett is a bit of that basic sometimes.
Whether one believes it or not, the oil market factors below point to a nuance. I don’t focus on breakevens. They only matter in terms of who is winning the most at the moment.
The Secretary-General of the Organization of Petroleum Exporting Countries said about their announcement: “..energy security has a price.” The OPEC+ system has common interests. In addition, the upcoming winter in Europe may reveal more challenges affecting energy and food security.
In the winter of 2021, before Russia invaded Ukraine, Europe was riven, turning away from natural gas as well as other energy sources without sufficient and safe backup sources of renewables. One of Europe’s tragedies stems from its excessive dependence on Russian gas, which is now in short supply and causing great suffering to individuals and companies. The German economy, Europe’s engine, is expected to shrink 3.5% next year according to Deutsche Bank Climate forecast. More coal is now being mined, shipped and burned to address the energy shortage, with more pollution spreading through local areas and around the world. Dutch futures, which reflect gas prices in Europe, were at $64 for year-end delivery in late September. They are down to the $50 range, but winter and other factors have yet to be determined. weather prediction It can affect pricing expectations and other factors.
Ironically, the United States has one of the most, if not the most, market-based energy systems worldwide. Our energy mix moves accordingly. Research and development, tax policy, and US government incentives have helped advance shale oil development, side by side private sector. This took decades to develop.
The supply chains surrounding energy, food and resource security are changing. (And the Investing in the supply chain Theses are endlessly explored.) After identifying some research on Poor performance of mutual fundsI started thinking about capital efficiency required for this energy transfer.
Capital market challenges in the energy transition
I fear that the recent rush to like-minded ESG-related funds and instruments is distorting capital allocation. We’ve seen markets lean toward green funds during the pandemic (and at other times) and now swing toward value investments and the established economy. This value destruction does not solve anything.
According to a recent interview, since publicly traded companies, global citizens and other oil and gas companies have been burned in the past five years, they will produce resources more conservatively, return cash to shareholders, and run business according to shareholder mandates. In this scenario, the oil and gas status quo is expected for up to a decade. This is a very long window now.
(see youtube Video for CEO and CIO Jay Hatfield and Jennifer)
Bets on energy and sustainability efforts
First, I invest in companies with my time or money that is a net benefit to society, and problem solving. I invest in oil and gas companies that have strong leadership and sound licensing techniques, with scope, scope or mandate to advance society. Sustainable infrastructure companies and funds are part of my resource-oriented portfolio as well. I wouldn’t underestimate the influences of innovative companies, FAANGs-plus of all sizes, in driving the energy mix either. Increasingly, the lines of traditional economics, new economic organizations and how they function are blurring.
For decarbonization efforts, better efforts are needed to transparently reflect carbon market instruments – such as carbon investment vehicles, voluntary and involuntary markets, and trade regimes – to sort out the highest value. It feels like the frontier of the Wild West, which is exhilarating but fraught with danger. [With a small-batch of shares, I’m watching KraneShares Global Carbon ETF: (KRBN).]
In conclusion, this market tour only describes a world of energy possibilities. The market is noisy but there are noticeable patterns. It really is the realm of stock picking in my mind.