Thread by @pickeringenergy

A few thoughts #EFT #OOTT

Seems like old times...the bad old times. The yucky market finally caught up with oil and energy stocks. WTI went from "so good its almost bad" in the $120's to "still darn good but falling like a knife" in the $110's. XLE -20% since last Wednesday.

Let's not forget natty. The cool new kid at the party wound up puking in the bushes - dropping from $9.30's to $6.90's (-26% for those scoring at home).

To what do we owe this nasty behavior? Well, risk off is the easiest and most obvious answer. Everything's ugly.

If the popular wisdom was "tech can't bottom until big tech cracks"...then maybe we say "the market can't bottom until the best performer - energy - gives some back". This week people sold winners (energy, oil, gas) and losers (lots of other sectors).

The driver underneath - people are getting really scared about demand and a hard landing. If the Fed is going to pound away mercilessly, then doesn't all type of demand have to crack - for vacations, for cool clothes..and even for gasoline.

Then we have a stronger dollar..which had been ignored by oil folks..but has to be on the list of contributing factors for oil weakness. Now lets layer in the political. The White House "inviting" refiners for a meeting (tongulashing?) on June 23 with Energy Secretary Granholm.

Loved the clip of Granholm saying "it is the patriotic duty" of energy companies to produce more and bring down the price of oil. Puhleeeze. But meanwhile the drumbeat of windfall profits taxes and exports bans gets louder. Doubtful these can/will happen, but another overhang.

Roll it all together and energy is taking a serious breather. It is clearly painful to be involved in a pullback like this. And the pullback could get worse - technicians say the moving average is another 10% lower, etc. The market can keep pulling the group lower in its wake.

But the most relevant question is...IS THIS CYCLE OVER? Supply has not responded. So supply isn't the culprit. Therefore, you have to put your macro hat on and ask yourself how bad you think this economy is going to get.

History shows that a "normal" recession doesn't really kill energy demand..it dampens demand growth. In the past 50 years, it took covid (2020), global financial crisis (2008, 2009) and 5+ years of very high prices (1980-1985) to push demand negative.

If this is the 1970's again, the demand will go down in 2023 and perhaps 2024. Which makes what happens with Russia really important. Are 2-5mmbbls/day getting "cancelled" over the next few years. If so, the oil market stays tight even if demand goes negative.

I have been saying for a while that I was worried about high prices causing demand destruction. As oil comes down, I worry less. The demand we're losing at $5/gal gasoline will slowly return at $4/gal gasoline (if this happens).

It feels to me like WTI is pinned at $120/bbl by demand destruction and economy fears and $95-$100/bbl by lack of supply additions. This is a pretty darn good price range for energy profitability. Dare I say amazingly good.

Energy stocks are digesting the tug-of-war in both the overall stock market and the oil markets. If WTI goes to $100/bbl, energy names go lower. If WTI stops going down, the energy names will begin to outperform again. If the market stops going down, the energy names will rip.

Figuring out the timing is important and damn hard. For investor/owners, fine to add more right here at these levels..going to pay handsomely over time. Flip side - @TeddyGambino made a great point that energy could get sold hard into the end of the JuneQ.

I'd love #WrongWayJimmy to come out and say he can no longer support "the oils" - that would be an awesome all clear signal. Maybe we just need a few sideways days to clear the air. Regardless, valuation is noteworthy.

Energy names are trading at mid-high single digit dividend yields and much much higher free cash yields. The FCF yield depends directly on continued high oil price, but the dividend is much less price-sensitive.

When we think about sustainability of the cycle, one interesting tidbit. Since energy stocks started tanking by 20%, NYMEX futures for calendar 2025 oil are off a whopping -1.5% ($77.06 to $75.90). Longer dated crude is NOT scared. Not at all.

Best of all..it is a Friday, the US market is closed on Monday, we can't lose any more money for three full calendar days and it is time for #FridayRollCall. Bring it hard #EFT..we earned every damn drop this week!