Energy Sector

[shru]

Why oil stocks are crashing so fast despite oil price is still around $110?

oil stock party seems to be over.

[Gregmal]

Everything lately getting thrown out with the bath water. Group think fear inspired market mentality along with Q2 book marking taking place and even index reshuffling. IMO there’s some absolutely tremendous opportunities that have presented themselves in the last few weeks.

[jfan]

May give you some insight

 

[Sweet]

IMO oil price at 120 was too high for the world economy.  It’s good that it has softened a bit.

 

Energy equities moved too far and too fast, they have had a huge spike up in less than a month.

 

Historically we are in a price range that have had a lot of willing buyers and sellers.

 

I think the spike higher over the last month indicates the direction of travel, it’s just going to take time.

[MattR]

15 hours ago, shru said:

Why oil stocks are crashing so fast despite oil price is still around $110?

oil stock party seems to be over.

End of Quarter window dressing. This pattern was noticeably in BTU for the last two year, seems it has spilled over other energy stock as well. 

[Spekulatius]

27 minutes ago, MattR said:

End of Quarter window dressing. This pattern was noticeably in BTU for the last two year, seems it has spilled over other energy stock as well. 

Except its not the end of quarter. Anyways, energy has become a momentum trade with the boat fully loaded at one side. Have you seen single bear lately?  Anyways the @Spekulatius rules says that whatever everyone expects is not going to happen.

 

I think energy prices are going back to where they were before Ukraine eventually, since the Russian oil still makes it to market just through other channels.

NG however should stay elevated since the Russian supply to Europe is dwindling and eventually is going to disappear and need to be replaced from elsewhere.

Contrary to crude, the Russians cannot just redirect their NG elsewhere, their  NG will remain stranded for quite some time, until they can build infrastructure to sent it to China etc.

[Gregmal]

2 hours ago, Spekulatius said:

Except its not the end of quarter.

Come on Spek. Unless you're trading odd lots the 2-3 week period into quarter end is where all the book marking takes place. Especially in a market like we've seen, inspired to such a great degree by non fundamental based transacting, I dont think its an irrelevant part of the equation. 

 

Whats weird though is it is at least to me, starting to seem like this "soft landing" or "hard landing" or just a "landing" is occurring. Theres such an element of supply and demand to all of this that it got comical watching people and talking heads chase their tails contradicting themselves. We were gonna have rates rise in perpetuity because prices needed to come down. Rates rising in perpetuity has to indicate prices ripping higher for a lot of that "perpetuity" timeline. But at the same time now car prices, chips, basically all the cyclicals and beneficiaries of those continued higher prices, plummeting! Look at Micron! So then they declare "recession"! but you arent going to have perpetually higher rates with a recession, because the hallmarks of recession indicate demand for everything ceases up. Which is what the Fed said it wanted to get to in order to level off rates. Energy is kinda in the same boat. You kill air travel, road trips, basically X out all the leisure and discretionary usage...down she comes. You can't have all the shit everyone is predicting because it doesnt mesh. You can't go swimming at the South Pole and you cant drive to Bermuda from Tennessee. If we have a recession, you cant have the price of everything go up 5-10% a year in perpetuity. Maybe a few inputs here and there, but not all of them. And if you cant have that, rates arent going much higher because thats what the fed is seeking to curb. 

 

Its been so obvious watching the market for the past 2 quarters how 99% of participants have ZERO clue what they are doing, what they own, what drives markets, and ultimately how cycles and supply and demand work. They all just follow the noise and the crowd. All that matters is whats working this day or week or month, and if its bullish we worship Bill Miller and co and if its bearish we praise Grantham, Hussman, Spitznagel etc and ignore their shitty performance and track records of calling for doom 12-15 times a year, every year. Personally I find it both exciting and fascinating. 

[Gregmal]

I mean this week was so enlightening because the Fed statements basically confirmed we are done soon IMO. They doubled down on no recession, and strong data. However as has already been discussed, we re one quarter print away from a technical “recession”….it’s pretty likely, and then what? Egg on the face and yea we got a recession, and since everyone blames the Fed for everything that happens in the world and especially the stock market and economy, what do they do? Powell very clearly said they’re not trying to cause a recession, and that there’s no signs of one, but in august the data will likely confirm one. Now, I don’t think the Fed caused any of this one way or another,  just like it seemed super obvious to me Peloton numbers and stock would peak Q4 2020 into Q1 2021…well in December you just had to wait for time to pass….same shit is already happening in real time, one by one, on the inflation inputs. Anyone got a lumber or steel price chart? I seriously don’t know what TF folks do to themselves to get so wrapped up in the current stories but all the data is right there to be had and it contradicts most of the existing narratives. 

[mcliu]

I think the fundamentals for crude has not changed. The current supply crisis is driven by lack of re-investment due to poor energy policy and the Ukraine crisis. Oil is a constantly depleting resources, you need to invest a large amount (maybe >600B annually) just to maintain production, let alone grow.

 

Current developed country policy is to ban ICE vehicles by 2030 and eventually kill the fossil fuel industry.

No company will want to make large long-term investments in this type of environment. Investors are also demanding quick return of capital for the same reason.

 

In addition, the hurdle for re-investment continues to go up with higher interest rates and just plain lack of financing as banks also pursue ESG goals.

 

A major recession will likely crimp demand in the short-term, but given the fragile political situation and despite the tough talk from Powell, I think countries are likely to ease far sooner and run negative real-rate policy than to suffer a major downturn.

[Gregmal]

11 minutes ago, mcliu said:

I think the fundamentals for crude has not changed. The current supply crisis is driven by lack of re-investment due to poor energy policy and the Ukraine crisis. Oil is a constantly depleting resources, you need to invest a large amount (maybe >600B annually) just to maintain production, let alone grow.

 

Current developed country policy is to ban ICE vehicles by 2030 and eventually kill the fossil fuel industry.

No company will want to make large long-term investments in this type of environment. Investors are also demanding quick return of capital for the same reason.

 

In addition, the hurdle for re-investment continues to go up with higher interest rates and just plain lack of financing as banks also pursue ESG goals.

 

A major recession will likely crimp demand in the short-term, but given the fragile political situation and despite the tough talk from Powell, I think countries are likely to ease far sooner and run negative real-rate policy than to suffer a major downturn.

There’s definitely structural tailwinds for sure. We will see oil stimmies at some point I think. It’s the only thing that makes sense because you can’t get elected running off the idea that poor people should be driving EVs instead of complaining about gas prices.

[MattR]

5 hours ago, Spekulatius said:

Except its not the end of quarter. Anyways, energy has become a momentum trade with the boat fully loaded at one side. Have you seen single bear lately?  Anyways the @Spekulatius rules says that whatever everyone expects is not going to happen.

 

I think energy prices are going back to where they were before Ukraine eventually, since the Russian oil still makes it to market just through other channels.

NG however should stay elevated since the Russian supply to Europe is dwindling and eventually is going to disappear and need to be replaced from elsewhere.

Contrary to crude, the Russians cannot just redirect their NG elsewhere, their  NG will remain stranded for quite some time, until they can build infrastructure to sent it to China etc.

Q2 ends at 30.06. Historically the selling has started 2 weeks before the end. 

While energy has gained some momentum, it is still far from boat fully loaded. I agree that oil might have some downturn, but that is a mixture of a bit of hype and window dressing. Look at the inflows. ARKK had inflows of a single day, that were higher than the xle inflows of several months. Look at the hedge funds, they are still deep into tech and FANGs. 

 

Oil was around 90$ before the war. Given the current valuations of the oil stocks, they would still be very cheap. Yeah everyone on Twitter calls for $300 oil, but the oil companies don't need or even want that. 

 

 

32 minutes ago, mcliu said:

 

Current developed country policy is to ban ICE vehicles by 2030 and eventually kill the fossil fuel industry.

No company will want to make large long-term investments in this type of environment. Investors are also demanding quick return of capital for the same reason.

 

In addition, the hurdle for re-investment continues to go up with higher interest rates and just plain lack of financing as banks also pursue ESG goals.

 

A major recession will likely crimp demand in the short-term, but given the fragile political situation and despite the tough talk from Powell, I think countries are likely to ease far sooner and run negative real-rate policy than to suffer a major downturn.

 I don't think it will, and I think we will see the ICE bans being lifted soon, due to the even higher prices on the metals. Also there is so much use for fossil fuels currently, its crazy. Look at the 2020 oil usage. The whole world locked down and there was a 9% drop in oil demand. Actually crazy. 

But I agree that re-investments are impaired through policies and ESG goals. 

[SharperDingaan]

Come on folks ,,,  2 weeks to go through June 30, average Q2 energy prices have been stela, and come early august, the entire industry will report earnings off the charts. What do you think happens when companies start announcing special dividends and buybacks in a big way?

 

SD

[Gregmal]

This guy comes for them?

 

[MattR]

3 minutes ago, Gregmal said:

This guy comes for them?

 

That is why I don't buy US oil companies, just coal. My oil exposure is outside the US in Canada, Brazil, Peru and Argentinia. There are still risks, but those are priced in mostly. 

[ICUMD]

2 hours ago, SharperDingaan said:

Come on folks ,,,  2 weeks to go through June 30, average Q2 energy prices have been stela, and come early august, the entire industry will report earnings off the charts. What do you think happens when companies start announcing special dividends and buybacks in a big way?

 

SD

Agree with this.  Oil profits going to share buybacks, debt reduction and dividends.  Demand destruction? Maybe if we go full blown recession. What's the alternative? Even coal is making a comeback.   All those years of ESG.  Time to pay the oily piper.

[Spekulatius]

20 hours ago, mcliu said:

I think the fundamentals for crude has not changed. The current supply crisis is driven by lack of re-investment due to poor energy policy and the Ukraine crisis. Oil is a constantly depleting resources, you need to invest a large amount (maybe >600B annually) just to maintain production, let alone grow.

 

Current developed country policy is to ban ICE vehicles by 2030 and eventually kill the fossil fuel industry.

No company will want to make large long-term investments in this type of environment. Investors are also demanding quick return of capital for the same reason.

 

In addition, the hurdle for re-investment continues to go up with higher interest rates and just plain lack of financing as banks also pursue ESG goals.

There is no country that plans to phase out the sale of ICE vehicle by 2030. The earliest I have seen is the EU planning to phase out the sale of ICE vehicles by 2035. I think there is just one or two states in the US that perhaps plans to end sales of ICE vehicles by 2035, but that’s not a sure thing.

 

However, even if that’s is true, stopping the sale of new ICE still means that a lot of ICE vehicles will be on the roads and need gas 10 years after the sales have stopped, so even in 2045, we will consume a lot of gas.

 

Then there is the fact that this does not apply to trucks and other modes of transportation like rail, which consume mostly diesel.

 

I don’t see why it matters if gasoline consumption starts to go down after 2045, because any news field that is developed now, will long be depleted by then. Shale oil wells deplete failure quickly and most oil is gone in 3 years and after that they have a long tail of much lower production. Huge oil field in the deep sea mostly last perhaps 10 years and then go into a fairly rapid decline (unless satellite fields are found).

 

Anyways, even if all this happens , oil demand will continue to increase slowly  for another 25 years at least so all this does not really matter. None of this has anything to do with what happens to prices in the next 6 month be my take is that the whole Ukraine affair should not be that big of a deal for crude market because the Russian crude does not disappear from the world market, at least not directly.

 

Now NG is a different  matter and here we might have a real shortage as the Russian gas more or less disappears for quite some time and the shortfall needs to be made up from different sources.

Edited June 19, 2022 by Spekulatius

[SharperDingaan]

People just don't get that fields have been permanently put into blow-down. Net depletion drawing down longer term o/g supply at about the same rate (or faster) than overall demand. Ongoing industry maintenance capex being stripped and applied to buybacks and dividends for at least the next few YEARS. 

 

Global production not being maintained, will keep O/G prices elevated for a very long time, and allow the price to be used to establish EV (energy source, capital stock manufacturing, etc.). Exxon 'rebranding' from an O/G company into an 'energy' company, providing primarily electricity. Powered from gas turbines, wind, wave, and geothermal.

 

Investors have a hate, 'cause energy is just 'too difficult' - can't just trade a 'story line' anymore. Analysts/governments have a hate, 'cause the industry is winding down - and the 'old metrics'  just no longer hold anymore. Spin doctors have a hate, 'cause record quarterly cashflows keep getting jammed in their face - forcing them to talk about it. And as indexes continue to fall ... o/g weightings only look better and better.

 

Nothing like the smell of napalm in the morning.

Just enjoy the feast.

 

SD

 

 

Edited June 19, 2022 by SharperDingaan

[Sweet]

13 hours ago, Spekulatius said:

There is no country that plans to phase out the sale of ICE vehicle by 2030. The earliest I have seen is the EU planning to phase out the sale of ICE vehicles by 2035. I think there is just one or two states in the US that perhaps plans to end sales of ICE vehicles by 2035, but that’s not a sure thing.

 

Howeve, even if that’s is true, stopping the sale of new ICE still means that a lot of ICE vehicles will be on the roads and need gas 10 years after the sales have stopped, so even in 2045, we will consume a lot of gas.

 

Then thetrnis the fact that this does not apply to trucks and other modes of transportation like rail, which consume mostly diesel.

 

I don’t see why it matters if gasoline consumption starts to go down after 2045, because any news field that is developed now, will long be depleted by then. Shale oil wells deplete failure quickly and most oil is gone in 3 years and after that they have a long tail of much lower production. Huge oil field in the deep sea mostly last perhaps 10 years and then go into a fairly rapid decline (unless satellite fields are found).

 

Anyways, even if all this happens , oil demand will continue to increase slowly  for another 29 years at least so all this does not really matter. None of this has anything to do with what happens to prices in the next 6 month be my take is that the whole Ukraine affair should not be that big of a deal for crude market because the Russian crude does not disappear from the world market, at least not directly.

 

Now NG is a different  matter and here we might have a real shortage as the Russian gas more or less disappears for quite some time and the shortfall needs to be made up from different sources.

 

Spek, the UK is banning ice engines by 2030.  Hybrids will be given a stay of execution for a bit longer.  Diesel and petrol only though is gone.

Edited June 19, 2022 by Sweet

[Gregmal]

Energy is just gonna be the new tobacco. Lots of money to be made. Even at $80 a barrel 

[Spekulatius]

3 hours ago, Gregmal said:

Energy is just gonna be the new tobacco. Lots of money to be made. Even at $80 a barrel 

Tobacco is much better business than oil because Capex is minimal and there is no risk that prices are going to fall by 50%. I understand that most people here are bullish on energy prices, but 50% + price drops for the commodity are well within the realm of possible.

 

I say this much - if prices fall to $90/ brl, there will be 25%+ losses in energy stocks in short order from current levels and higher with small cap/ micro cap.

[Spekulatius]

3 hours ago, Sweet said:

 

Spek, the UK is banning ice engines by 2030.  Hybrids will be given a stay of execution for a bit longer.  Diesel and petrol only though is gone.

Thx, wasn’t aware of this. It helps that the Uk has no car industry to speak of. Also, the hybrid loophole is a a huge one as the industry is trending toward hybrids anyways. I think there will still be a lot of gas sold in 2040 and even 2050 because the lifespan of cars has been growing and now cars on average are on the road for 13 years and I think it will be 15 years  by that time. Your local gas station will be around for a long time, most likely.

Edited June 19, 2022 by Spekulatius

[mcliu]

https://en.wikipedia.org/wiki/Phase-out_of_fossil_fuel_vehicles#Places_with_planned_fossil-fuel_vehicle_restrictions

Several countries starting 2030 and earlier. Most around 2035, 2040. Couple this with emerging market growth and you can see crude growth for several decades still.

 

https://www.rystadenergy.com/newsevents/news/press-releases/global-energy-spending-set-to-reach-record-high-of-over-2-trillion-in-2022-led-by-oil-and-gas/

$658B to maintain 99.6mbbl/d. Costs are also increasing due to inflation.

 

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/european-banks-cut-fossil-fuel-financing-unlike-north-american-peers-8211-report-69564218

European banks cutting financing.

 

On a personal level, if you ran a major company like BP/Shell, you'll be less hated by the public & politicians if you diverted capex to solar/wind. Sometimes it's not a rational decision. All of these little things might compound into a major shortage somewhere down the road. As Munger calls the lollapalooza effect. 

[lnofeisone]

I agree with SD, only 2 weeks left for this Q and prices for O&G stayed elevated through this Q. Numbers are going to be bonkers. Debt reductions, dividends, buybacks will be prominent. Exxon is kicking off on 7/29. 

 

As far as inflation, I think we will precipitously drop to 3 or 4% and stay there on core. What's going to continue to hold inflation there is what a lot of this board is betting on - housing. The other component that will likely stay elevated is recreation due to pent up demand. 

 

Headline inflation will stay elevated until energy food crises have more certainty. 

 

I suspect economy will slow down and likely post another quarter of negative GDP after this one (so 3 in total). The consumer is feeling the pain at the pump, on food, etc. Energy story isn't changing and food shortages are persisting. I can see O&G drop because of that but the floor here will be dictated by supply/demand. European gas will play out based on geopolitics. Either way, lots of volatility but O&G companies will continue to make money. 

[Ulti]

https://podcasts.apple.com/us/podcast/why-its-so-hard-to-get-the-oil-taps-turned-back-on/id1056200096?i=1000567103730

[Spekulatius]

18 minutes ago, Ulti said:

https://podcasts.apple.com/us/podcast/why-its-so-hard-to-get-the-oil-taps-turned-back-on/id1056200096?i=1000567103730

I just listened to this one and it's excellent. The issue with getting people to work in the industry is serious  one and it's not something that is going to change. If you are technically inclined and deciding on a career - would you consider getting into mining or petroleum engineering? Quite frankly, such a choice would make no sense, because even now, you can make way more money in tech.

The industry needs to incentivize people enough with great profit sharing plans that people actually can get rich there rather than just pull a comfortable salary for a couple of years in boom years and then have to live and work in fear of getting laid off for half a decade when the energy bust comes which is inevitable.

 

We may need an immigration program to get people from other countries to work here for example. Back when Chavez started to wreck PDVSA a lot of skilled labor came to the US (one of my buddies worked there as a material scientiest and moved to the US).

Edited June 20, 2022 by Spekulatius