Energy Outlook: Real Assets, Geopolitics And Post-Crisis Liquidity (Video)

The ripple effects of the banking crisis colored and changed many a thesis at an investor conference in Austin during SXSW's tech days March 13-14. Earlier, during the week of March 6 at CERA in Houston, the global energy event offered insight into the minds of many of energy's most influential players.

The following video captures the last three weeks in energy and market sentiment from my energy and investment point of view after connecting with investors and energy market players of all types. Michael Hopkins interviews about the happenings:

After the Conferences: Energy, Geopolitics, and Post-Crisis Liquidity (You Tube video link of interview)

At day one of the investor conference, a seasoned banking investment veteran offered color about the first days of the market’s opening after Silicon Valley Bank’s (SIVB) collapsing episode. I thought about the movie “It’s a Wonderful Life.” We were having a modern-era bank run, fueled by the rumor mill of social media and commentators. But the Fed also stepped in and had done their job.

Noted in the talk were three circles of contagion—venture capital, crypto and a bond bubble. At the heart of the SVB crisis was a mismatch of assets and liabilities. Concentration risk also played into the mix. From both this talk and the conference’s investor attendees, banks were noted to be tightening credit as interest rates have risen. The effects of this were being revealed in real estate loans as noted in a Dallas Fed Texas economy outlook 2023. (See YouTube video “Global Energy: Inflation, Dislocation…” or on Seeking Alpha.)

The manager selection and alternative strategies panels overlapped in ideas, with SVB a cautionary tale. Some of the investors that were not tech investors—the value investors—were excited about the mis-pricing of assets currently. This rotation from tech, which began last year into “old industry,” was noted in several videos, and particularly the advent of the end of cheap money discussed with Accounting Professor Sean Wang and on other investor calls. The (QQQ) and (NYSEARCA:XLE) are proxies for this dynamic. It is as if we have been watching a slow-moving train wreck for a year. Now, think managed futures for portfolio guardrails, an investor opined, or (PQTAX) as in my portfolio, and he continued with 'picks and shovels', both in public and private markets.

(Bellwethers analysis here with Wang.)

The commercial real estate sector is thought to be the next casualty of the fallout in the economy at large, with its interplay with interest rates and the secular trends of remote work.

It’s now a due diligence world. That means information, trustworthiness, and credibility. Track records matter.

In this volatile and dynamic time, the themes of dislocation, opportunity and sustainable approaches are still at the forefront. The fundamentals very much apply though. And energy is fundamental.

Post-CERA

After CERA week, where the global energy world just converged, media and other analysts hashed through what is happening in oil, gas and the transition. Where traditional and newer energy sources merge and intersect is becoming trickier to disentangle. The U.S. Inflation Reduction Act (IRA) is sparking a kind of renewal in the space for all market participants. At CERA and for the last many months, the U.S. IRA legislation has been top of mind with business and governments.

Grounding oneself in the oil market is a start however. According to S&P Global, much of Russia’s lost European market has made its way to India, China and Turkey: “Russian oil flows to India have been barely a year old, but at around 1.5 million b/d it already makes up more than 30% of Indian crude oil imports.” A shadow fleet however was said to have already been in the works before the December embargo went into effect. This oil has displaced Middle East, West African and US crude oil imports. The price discovery impact for Ural oil is an approximate $18 per barrel discount to Brent, the global benchmark. Other geopolitical factors are at play. This becomes relevant in two ways.

First, trade flows are changing in specific ways. This was noted in a S&P article post-CERA of March 10. OPEC has downplayed its impact, as Russia is part of the OPEC-plus pact, citing that flows are simply re-directed as happens. Second, these 1.5 million barrels per day, a piece of the market volatility puzzle inherent in oil markets, has trickled through, found a home. What is the stickiness of this? What are its implications on price in the short- to medium terms? How does it matter? According to the BP analysis I recently parsed, it's a GDP hit for everyone, but more so for developing countries further out in time. (Video “Global Energy 2023: Ripples …” )

A select few notes of interest from my panel presentation:

Oil. A tight market is expected the second half of 2023. That means higher prices than the recent $70 range (exception being now the crisis fallout). The futures curve does not predict oil prices well. We are in a new period in oil demand… It’s cloudy. On the supply side, all producers are pumping to capacity.

U.S. independents were globally recognized by certain global parties, and those parties want to cooperate more with U.S. shale. Incidentally, we pick up some of Russia’s losses in oil production and LNG exports, for now.

My thoughts: US shale increased 2 million b/d in 2010 to roughly 12 million. Russia declines from 12 million b/d to 7-9 million by 2035, or a 5-7 million b/d decline per BP’s outlook. U.S. independents are beneficiaries.

Gas. The main story is a global gas map being re-drawn. The contours were not quite clear in October, but are more clear now. LNG competition for cargoes exists between the EU, China, Japan, etc.

The U.S. picks up 50% of Russia’s LNG trade to 2030, largely directed to the EU and China, but other Asia as well. We have export constraints. More LNG terminals need to be developed, and investors need to be discerning about firm capabilities and balance sheets. Pipelines and constraints exist in Appalachia (the Marcellus) and therefore production.

Green happenings:

Texas is the leading state in wind and solar, and going forward — and battery storage investment, though nascent, is apparent as well. The Gulf Coast is a beneficiary of the IRA through firms of all sizes. Oil Majors are forming partnerships and making announcements in CCS, sustainable fuels and hydrogen, particularly Exxon (XOM) and Chevron (CVX). The IRA is the great leveler of new approaches, with energy sources complementing each other and competing. Significant funds are available for wind and solar, but green shoots are emerging in CCS and hydrogen, nuclear too.

In the U.S., Texas and the Louisiana Gulf Coast are the seat of exports of oil, refined products, and LNG, and will be participating in the “energy transition” through the IRA. This is a place where many U.S. players are attempting to develop cleaner barrels and new tech is emerging for natural gas emissions reductions too.

In spite of interest rate hikes and their spillover effects, the fundamentals in energy will keep pushing the boundaries of creative destruction. This is also apparent as the market and capital allocators rethink their strategies and priorities. The idea of liquidity and its value is going through a revival.