🤔Oil Demand Destruction?🚘🛩🌪🌀❄️

Unlikely. Even as WTI Crude slips below $100 per barrel and Natural Gas hovers around the $5.50 mark, the broader energy markets remain strained. While Citi Group and others see the potential for crude to fall below $65 this year if a recession occurs, other energy consumption indicators tell a different story. Instead of technicals, let’s look at recent history and some more subjective human indicators.

If you have traveled by air in the past few months, there is a fair chance you experienced some delays—similar to the supply chain capacity mismatch, there is a shortage of pilots, flight crews, maintainers and port personnel causing airlines to cancel thousands of flights. Just ask the crews—many are working 6 days a week, others are using vacation time or were never brought back after the COVID slowdown. Waiting an hour for your bag should give you a sense that the port isn’t running at optimal capacity. Not unlike the various regional, national and global supply chains in [pick your favorite industry], the almighty dollar incentivizes balance…as airlines get their shit together, their energy consumption will increase.

As more employers forget COVID was ever a thing, they will demand employees return to the office, putting more cars back on the roads. As climate change intensifies, vulnerable refining capability along the Gulf may experience disruptions during hurricane season and temporarily implode supply in the markets….or another freezing winter in Texas may demage fragile midstream pipelines, terminals or distribution points causing a similar effect. Extreme winters will likely increase natural gas consumption, particularly in Europe where natural gas challanges are made worse by what is likely to be a protracted conflict in Ukraine.

U.S. and EU policymakers continue to send mixed signals to the energy majors. The expectation is for them to simultaneously “go green,” and invest in billion dollar fossil energy projects that require decades of operation to produce adequate returns. Without a forward looking, stable policy environment from lawmakers, energy majors have little incentive for such massive capacity expansions, some of which take years to come online.

Just like with port management and backed up freighters, policymakers oversimplify the challenges, give the voters someone to blame, and do little to solve any of the underlying issues.

We’re all about the Green transition, but favor companies who are actually making money and investing in the future through R&D and acquisitions, nurturing new technologies and ideas while still delivering value to shareholders. The ones who can withstand whiplash from policymakers are the ones that should be in your portfolio.

For now, we’re going to disagree with Citi and stay long on oil and energy broadly.