1/n This thread will address some of the most frequent fallacies that are encountered in #energy investing.
While timing any commodity market is notoriously challenging, it is important to have guidelines & a basic framework of understanding.
#OOTT #EFT #Oil #shale
While timing any commodity market is notoriously challenging, it is important to have guidelines & a basic framework of understanding.
#OOTT #EFT #Oil #shale
/2 Myth: The transition away from #fossilfuels means that #Oil prices are permanently capped. Reality: oil is a depleting physical asset, with high capital intensity. When prices are high, producers expend significant time & capital exploring for oil & gas. When prices are low,
/3 exploration is reduced. This ebb & flow means that oil remains a boom & bust commodity, despite the best efforts of companies, countries, & cartels to dampen the amplitudes. No one country, or bloc, sets the price. Not ‘Big Oil,’ not #Saudi, not ‘speculators.’ Oil Demand is a
/4 function of broader Econ activity, which, more than any other factor, dictates price. Healthy economy, growing energy demand, higher oil prices. While the transition away from fossil fuels will accelerate as costs decline for competing energy sources, the vicissitudes of
/5 economic cycles will mean oil prices remain volatile. Sometimes low, sometimes high. But not capped.
Myth #2: Oil prices cannot rise as long as there is “spare capacity” of Supply. In recent months, one has often seen articles that reference #OPEC’s spare capacity, or the
Myth #2: Oil prices cannot rise as long as there is “spare capacity” of Supply. In recent months, one has often seen articles that reference #OPEC’s spare capacity, or the
/6 potential supply above & beyond what is being produced currently. The argument being that, if said supply were tapped, it would glut the mkt & tank prices. In reality, nameplate capacity is seldom achieved, as technical constraints limit pumping ‘full tilt,’ and, more obvious,
/7 countries w/ highest reserves are disincentivized from tanking prices for any *sustained* period of time. Thus, while OPEC might have the ability to add, say, 7mm bbls by June of this year, the relevant lens to assess potential behavior is not ability per se but *self-interest
/8 & ceteris paribus, OPEC & other producers will elect to act in their rational self-interest. When it makes sense to pump a marginal bbl, it will be pumped. When it makes sense to shut-in, Kansas stripper wells get shut in, etc.
Myth #3: #shale is a “scam” that doesn’t work
Myth #3: #shale is a “scam” that doesn’t work
/9 at any price. It’s become accepted wisdom in certain corners (#EFT, ahem) that ShaleCos are perpetual cash incinerators, who have not, & will not, ever be profitable. Much of this criticism is well-deserved, & bad corporate behavior & poorly aligned incentives have given the
/10 industry a black eye. But to assert that ShaleCos cannot make $ at the corporate level, at any price deck, risks hyperbole. A sustained #WTI price of $60+, for example, would result in free cash flow for many operators. The problem, among others, is that extreme price
/11 volatility has made sustained corporate-level profits elusive. Again, this is *not* to defend or justify self-inflicted wounds; rather, it’s simply to highlight that saying these companies don’t work at *any* commodity price is equally misleading to suggesting that the whole
/12 of their problems began with Covid. The truth is that w/ sufficiently high prices these companies can & will make money. The question is whether—and when— those prices will arrive. In a follow-up post this week I will argue why 2021 is the right point in the Cycle to own
/13 #energy stocks. Thanks for reading. Feedback welcome & debate encouraged.
As always, no investment advice intended. DYODD
/end #OOTT #EFT #oil #shale
As always, no investment advice intended. DYODD
/end #OOTT #EFT #oil #shale
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