In a normal commodity cycle, the cure for high prices is high prices. However, that is no longer the case, and I will explain why I think that is the case. I will try to list sources where I can but a lot of this information has been synthesized over time and therefore you will just have to google some things. Even the sources I find will be articles I find on google to support my statements.
High prices do not necessarily create permanent demand destruction. Even in the worst parts of the 2008 recession, oil demand barely dropped. Not to mention that demand can recover and if the fed pivots, it can be quite inflationary at least for commodity prices where physical markets are tight.
Here is an article of which I only want to highlight a single sentence (but I figure I should include a source).
“In 2008, the Great Recession led to demand falling by 0.66%”
That is nothing! But supply had already grown too much from the shale boom, leading to a supply/demand balance that favored the buyer. Compared to today, however, as the bottom half of the world is lifted out of poverty, they will consume more oil. They will go from bikes to motorcycles and motorcycles to cars. Let’s be real: they aren’t getting EVs anytime soon.
Furthermore, as europe heads into an energy crisis and Russian gas is no longer an option due to nordstream explosions (only one pipeline left but it’s way smaller capacity than before), they will need to burn more oil and coal. This could lead to a lot of gas to oil switching https://bisoninterests.com/content/f/gas-to-oil-switching-–-winter-is-coming
I DONT WANT to hear any poorly framed arguments about european storage being full or TTF going negative. It doesn’t matter. Here is why anyone that tells you that europe will be fine with their storage doesn’t know what they are talking about: If you are driving cross country and start with a full tank that can get you 20% of the way there (being generous here), does that mean you can automatically make it coast to coast? No. You have to gas up. Likewise, getting through winter is the same. Gas storage cannot account for the entire winter. They need constant inflows. Heating oil, diesel and coal are just LNG without the infrastructure and therefore Europe will go for those next.
That being said, demand is ultimately very difficult to pin down. What I would like to focus on is supply.
Biden often complains about oil companies doing buybacks and dividends. Why? Because at these prices, dividends and buybacks get shareholders better return than growth at these multiples. Why are multiples low? Because institutions have shunned fossil fuel companies too long and Yellen and Granholm have also told development banks to tighten lending conditions to oil companies.
Yellen and fossil fuel lending:
Besides that, analysts will say “shareholders want buybacks and dividends over growth.” It’s becoming a tired phrase. Who are shareholders here? Greedy people like me who want gains and don’t want to have them produce more without me making any more money, and etf and fund managers like blackrock and vanguard who only are custodians of the shares but get all the voting power. Guess what? Not only are they greedy too, but they also want to choke oil. Consequently, the sector globally is in liquidation. According to Rick Rule (who I trust a lot), the oil industry is $1b/day underinvested in sustaining current output. Furthermore, if, for example, Brent is at $110 and oil stocks price in $60, am I going to want to risk oversupply? No! Because I would be terrified about what share price would do if it priced in $60 at $110 and then the price actually dropped down to $60. What would it price in then? $20 at $60? $10? Negative?
OPEC also cannot ramp up production anytime soon. And why would they?
They want $90+ oil
They can’t. Only Russia could have, but they needed western OFS, which all left the country, so their production will actually fall.
We must rely on western oil companies.
Unpopular take: oil prices will remain heightened and volatile and spikes will persist until oil stocks go up. The cure to high prices is no longer high prices. It’s high oil stock prices. They are stupid cheap, and until they trade at reasonable multiples, shareholders and etf managers like blackrock and vanguard will not let them do anything but dividends and buybacks. And that is great for CEOs and boards. No need to make hard choices. No need to take risks. Just say those two magic words, so of course they will choose the easy way.
tl;dr Shareholders will only allow significant new production when stocks go up. Till then, buybacks and dividends. If they are not making gains somehow, what the hell are they holding high torque cyclical stocks for? So stop throwing money into the bottomless hole that is tech. XOM just hit ATH. you will never make as much money as the guy you heard about it from, but there is room to run. If you are afraid of being late, late cycle OFS hasn’t outperformed yet. It’s a bull market.
Leave a Reply