Meeting the energy community in Miami

While my wife was snowed in with the kids, I had the pleasure of attending the Goldman Sachs Energy, CleanTech & Utilities Conference down in Miami.

Thank you to Neil Mehta and the entire GS energy team for the invitation. Truly some great people.

I was finally able to meet a number of subscribers and supporters face-to-face. Thank you all for your continued support.

Most importantly, all praise goes to my wife. If you know our story, none of this old energy data would be possible without her support.

The purpose of this post is not to recap every detail about guidance, efficiency gains, well productivity, or capital allocation. Instead, it’s to frame what I heard within a historical perspective on where we are in the various cycles.

The two days began with long-time supporter and friend of The Crude Chronicles, Arjun Murti of Veriten (HERE), sharing the stage with Jeff Currie and Daan Struyven to frame the topic: “Where We Are in the Cycle.”

Arjun and Jeff reflected on their experiences in the late 1990s, when no one cared about oil, and everyone’s interest was focused on tech. Within the commodity space, the only molecule of interest back then was natural gas. Sound familiar?

The discussion immediately brought my mind back to—you guessed it—the most important chart in commodities: Oil vs. S&P.

Arjun and Jeff’s insights are quite timely, especially when we zoom in and realize we are back to those late 1990s levels, when the last “super-cycle” was still in its infancy.

My view is that 2020 was this cycle’s 1998. These cycles tend to come in three waves, and we are currently somewhere between the “Doubt” wave and the “Optimism” wave.

The mood throughout the conference was bearish oil due to concerns about the overhang of OPEC spare capacity.

In my view, OPEC spare capacity is merely a reflection of global macro conditions and the strength of the dollar.

The U.S. has been the epicenter of global growth, attracting the world’s capital to invest in the Mag7. That capital has been drawn to the tech mania, which is increasingly becoming a more capital-intensive business. Growth in foreign markets, including China, has served as the funding mechanism for this shift, a dynamic that is also reflected in the rise of OPEC spare capacity.

But I look at the oil markets through a different lens than the crowd because I am not much of a barrel counter. Rather I prefer to count currencies across the globe. Right now those currencies when translated to USD are on the bullish side of the ledger (HERE).

The risk to this view is the strength in the USD putting a governor on global growth and thus the global credit cycle which may manifest itself through the weakness that is occurring in the housing starts data. Vicki Hollub, the CEO of OXY, echoed these concerns with regards to their PVC chemicals business which has residential exposure, a take that I thought was very interesting.

Many questions were raised about what the new administration means for the industry.

Political setups in Washington often come with a bit of irony. While the industry tends to lean Republican, energy stocks have historically thrived when Democrats control both the White House and Congress, achieving an average real CAGR of just under 13%. Biden’s first two years were no exception. In contrast, energy stocks have compounded at roughly half that rate when Republicans are in control.

History tells us to buy the sweeps and avoid the lame ducks. We'll see if Trump can avoid the midterm curse, where the incumbent party typically loses its majority.

Some argue that politics don’t matter for the industry because re-investment cycles are longer than presidential terms.

I disagree. Looking at it through a different lens, fiscal policy plays a significant role in shaping these cycles. When politicians lose sight of fiscal restraints to finance social spending programs or wars, they inevitably turn to the printing presses. These dollars not only stimulate commodity demand but also introduce an infinite amount of dollars chasing finite resources like oil. Such dynamic has been a driving force behind every commodity cycle over the past 200+ years.

Both Biden and Trump are populists. Populists like to print money, and they don’t care what the regulators of money (i.e., central banks) think. Bullish for oil!

Even annexing the 'Gulf of America' would require much more deficit spending. However, it may not be a bad idea, given that the PEMEX fields of KMZ and Cantarell would most likely see a rebirth under a Western major, which could help finance the endeavor. Just a thought.

However, investor sentiment often operates on a much shorter timeframe than what can be observed in a ~230-year chart.

The consensus view right now is bullish on anything tied to AI-driven power demand, including gas E&Ps, utilities, and midstream.

Conversely, sentiment remains bearish on traditional oil and gas sectors, such as oily E&Ps, refiners, Canadian majors, and especially OFS (oilfield services).