(Note: I recently presented research on energy and geopolitics at the University of Montana and the Council on World Affairs. In a related video, editor Michael Hopkins discusses recent research on energy, geopolitics, and recent mega-deals. You are interviewing me for download.)
The most unfortunate threat to the world economy is the instability and instability caused by the recent October 7th attack on Israel. We were already suffering from Russia’s invasion of Ukraine. Subsequently, energy trade routes for both oil and natural gas were reviewed. Energy trade relations may change direction again due to the situation in the Middle East.
The center of geopolitical gravity these days is the Middle East and Russia. Notably, in a recent US-EU energy webinar, NATO leaders spoke about how US LNG has evolved. In Europe, it increased by 70%. Norway has grown even further and now accounts for her 30% of Europe’s gas (115 bcm, etc.). He expects energy price fluctuations to continue for 10 years.
Regarding the Middle East, which I have spent a lot of my bandwidth evaluating and most of my time from October 4th to now, oil prices have, of course, increased to reflect the risk premium. As happened in Russia last year, markets begin to calm down when certain events and their direction become clearer. However, there are groups that actively try to instigate scorched earth policies and events. Ultimately, it will have an impact in other ways, such as domestic political instability and unpopularity with investors as a place to invest.
In both cases, alternative sources of gas and oil are being discovered by market participants. The United States plays an important role as the world’s source of oil and gas in Asia, and more so than ever before in Europe.
Europe is also continuing sustainable energy procurement, including alternative fuels, microgrids, and storage, with more homegrown solutions coming from a NATO perspective. In Montana, a panel discussion with a former Montana governor discussed various forms of storage and energy. Energy storage is becoming an increasingly interesting area with new ventures and acquisitions. Major companies like ExxonMobil (XOM) and Chevron (CVX) are all making investments to ensure they have a viable future in the emerging energy sector.
(Link to video interview on energy, macro outlook, and geopolitics.)
In light of today’s events, oil and gas markets and the energy transition will change the impact on investment. Rising interest rates will be a driver in ways we are starting to see, especially in renewables and EVs. Higher interest rates change decisions. I heard this idea at an economist conference I attended just before Montana, and he, the CEO of AT&T, echoed this sentiment. When it comes to “transition” type investments, I focus on needs-based investing. Anti-inflation laws are quite complex in terms of their incentives, distortions, net effects, and, ultimately, capital signals.
After all, oil is fungible and the most traded commodity. In developed countries, electrification can further accelerate inflation due to all sorts of environmentally sensitive factors, as seen in Europe. Many European countries have set back some of their original plans, but not completely. Electricity generation is also increasing in other parts of the world. A recent Texas-focused energy conference held at Texas Tech University on October 20 showed that unique demand centers are emerging in the technology sector that can offset the demand-supply mismatch that is occurring. It was revealed. My His 2023 theme of resource and capital efficiency is playing out in a big way in Texas thanks to decentralized markets.
As hinted at in the book Solving Europe’s Energy Crisis, natural gas trading is changing around the world. The United States is a low-cost producer of oil and gas and a reliable partner. As I said earlier in my presentation in Montana (about halfway through), we are a global benchmark.
Oil prices are likely to remain high as supply tightens toward the end of the year. US producers are expected to respond, but this remains a capital discipline regime for oil and gas companies. Natural gas prices in the United States are expected to remain at low levels going forward. Importantly, as geopolitics shifts mindsets and strategies, new avenues are emerging and U.S. production is a player on the world stage.
(Link to page about the concept of benchmarking)
The color lasts a little longer.
In recent news, West Texas Intermediate (WTI), the main U.S. crude oil price benchmark, will be included in the global benchmark Brent crude along with other constituents.
After years of controversy, the world’s most important oil price is about to change forever, allowing crude supplies from West Texas to help price millions of barrels of oil a day.
The change comes as tradable oil to maintain the reliability of the existing benchmark, dated Brent crude oil, is gradually being exhausted. As a result, its publisher, S&P Global Commodity Insights (better known to traders as Platts), is being forced to undergo a dramatic overhaul.
…The date, commonly known among oil traders, helps determine the price of about two-thirds of the world’s oil and even defines the price of some gas trades.
In the past, I’ve written extensively about the Pioneer, Permian, and most recently Exxon acquisitions. The market has received very positive feedback. Given the geopolitical events of recent weeks, it is even more positive to see consolidation and scaling occurring in some parts of the industry. Much was covered in my article from April when the acquisition idea was floated. (Article on potential first Pioneer Exxon (XOM) (PXD) partnership).
With the announcement of Chevron-Hess (CVX) (HES), continued consolidation in the industry illustrates the idea of scale and efficiency. This was discussed and analyzed in more detail starting from the first quarter of 2023. News that Devon (DVN) may be considering acquiring Marathon Oil (MRO) speaks to this continuing theme.
Several things stood out at the National Association of Business Economists’ October 9-10 conference. One of the sessions I attended focused on the macro environment, looking at the rise in long-term yields. This Wall Street Journal article speaks to that idea.
“What Wall Street thinks is happening is happening.”
Dallas Fed President Laurie Logan recently suggested that signals from the term premium model mean there is less appetite for rate hikes this year, and if a rise in the term premium is a reality, the sharp rise in yields would be a sign of stronger growth. He argued that this does not just reflect the need for rate hikes. Financial policy. —Quote from WSJ
Logan didn’t delve into what exactly is driving up term insurance premiums. But on Wall Street, many have used the term premium model to make the case that yields are rising primarily because of the federal budget deficit.
However, my notes from being in the room on October 9th read:
In addition to interest rate increases, economic agents are influencing premiums. This means that economic conditions may work out well for the Fed, and the Fed does not need to raise rates. But the overall feeling was that restrictive financial conditions would continue for some time. And we are yet to see the lagging effects of the policy and are only at the beginning.
The pressure is coming from long-term yields. Where the pressure is coming from determines the direction of interest rate changes (up or down). Logan said half of the long-term yield comes from the term premium.
then 19thFed Chairman Jerome Powell echoed Mr. Logan’s remarks.
“Chairman Powell said that rising long-term interest rates could reduce the need for the Fed to raise rates, but he said policymakers would wait and see how higher yields play out. Powell offered a number of explanations for the rise in inflation, including an increase in the government’s budget deficit, and stressed that deficits are on an “unsustainable” path…despite progress. Inflation remains too high and it is too early to be confident that inflation will return to its previous level, Powell said. The Fed’s target is 2%. Powell noted that the economy has been doing surprisingly well this year. ”
Regarding global macroeconomics, Mr. Logan mentioned the slowdown in global economic growth in the second and third quarters. China’s structural problems are influencing this, but nearshoring trends are also impacting global trade flows.
Furthermore, the comments made at the industrial hollowing-out study committee were impressive. Bottom line: A variety of business relationships are occurring. We are still dependent on Chinese trade. If you go through an agency in Vietnam or elsewhere, things just happen differently.
It is also possible that a trading block may migrate to a like-minded partner’s block. North America looks great and is “balanced”. Other parts of the world are even more difficult to predict, especially with this crisis and its impact on the Middle East and other regions. In the long run, “market” forces will prevail, but we are effectively in a mess.
Scale, redo, and integrate
U.S. industry is global, capable and efficient. We will continue to utilize technology to produce resources more efficiently and cleanly. With Exxon’s acquisition of Pioneer, we believe Exxon’s massive scale will enable new advances in the Permian that will spread elsewhere. The same goes for the Chevron Hess acquisition.
In general, my geopolitical lesson is that secession is not an option. We can engage with the rest of the world in parallel with the energy sector and capital markets. It’s a positive path: our technology, innovative spirit and market transparency.
Second, the theme that natural gas is a “transitional” fuel is still my main idea in that thought experiment. However, on a practical level, natural gas is generally a reliable and affordable source of baseload power. The emissions profile is cleaner, and efforts are being made around the world to clean up methane emissions, which are a byproduct of production if left unaddressed.
Regarding energy transfer (ET) and future capabilities, the eventual commissioning of the company’s Lake Charles LNG plant will be a net positive for the United States, the industry, and the rest of the world. Global companies such as Shell (SHEL) provide support for the management responsibilities of this position. (I’ll post a link in the comments once the story is published online.)
In summary, as stated in the video, US oil and gas offers a bullish investment theme. Given geopolitics, the tight oil market and the economic outlook, the majors chose an opportunity. In the Pioneer Permian Shale story in 2014, I mentioned that major companies had left the United States for global fields and were now returning. In 2023, they are back again with even more effort. As geopolitics and market conditions shift once again, the necessary energy infrastructure must function and connect centers of supply and demand. The midstream sector will also be part of the solution, including players as diverse as Energy Transfer, which has a large global footprint.
(Link to video interview with slides and detailed discussion)
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.