Daniel Yergin wrote the seminal book on the global oil industry, "The Prize: The Epic Quest for Oil, Money, and Power" in 1990. In investing in the energy space, though, I always keep my eyes not on the prize, but on supply.
Why?
The world simply doesn't have a sufficient supply of hydrocarbons to satisfy its growing population, especially in the developing world. The existential problem is that oil and gas reservoirs have an inherent rate of decline. So, it's a Sisyphean battle for the energy industry. Reservoirs are constantly getting depleted, and companies have to expend massive resources to keep that rock from sliding down the hill.
That's the big picture.
In the immediate term, U.S. natural gas prices sit at 14-year highs now, and oil prices are heading back to $100 per barrel with a bullet. That's why I started my HOAX family of model portfolios from my firm Excelsior Capital Partners and why I chose to benchmark it against Cathie Wood, and her leaky Ark fund (ARKK) .
To not only believe -- but to propagate through social media -- the ideal that oil prices are heading to $12 per barrel is cartoonishly untrue. I stake my firm -- and my clients' capital -- on betting against people who believe these statements. They have created this mythical narrative of climate change and then they try to stuff it down the throats of the investing public.
Like Steve Jobs, however, I think different.
Gloating aside, though, markets are about predicting the future, not celebrating the past. I see zero chance over the next 12 months of an upturn in global supply of oil and natural gas. I decided this week to go back to that disastrous OPEC Thanksgiving 2014 meeting and the cartel's decision to increase oil production. That led to an oil market pullback, and as so often happens in oilfields, natural gas is "associated," or co-located, with oil, and, wow, what a crash that was.
But the energy industry executive cohort is not populated with buffoons. The North American oil rig count stood at 1,920 on Thanksgiving 2014 and last Friday, according to Baker Hughes, stood at 964. So half as many rigs running as there were eight users ago. And you think oil prices are going to fall? Nonsense.
In natural gas, the supply picture is even tighter. Last Friday there were 160 natural gas rigs running in the U.S., vs. 355 as of Thanksgiving 2014. Where is this oversupply -- which, in basic economics, would drive lower prices -- coming from?
Hogwash.
Charif Souki, Chairman of HOAX-component Cheniere (LNG) , saw that the rest of the world doesn't have enough natural gas. This is evidenced by benchmark prices in Europe (TTF front-month futures are currently quoted at an astounding $225/million British thermal units) and Asia (JKM front-month futures are currently quoted at $56.72/mmBTU) that are multiples higher than we have here in the U.S.
Shipping LNG is kind of a pain -- including liquefaction and regasification -- but as Charif and my happy LNG-holding clients have learned, it is well worth it.
We are in the early innings of this ballgame, and those hung-up on environmental, social, and governance, ESG, are only making our team's competitive advantage grow by demonizing the exploitation of the Earth's all-natural hydrocarbon resources. Real Money readers know I always keep my eyes on the prize. That will not change. It is not too late to load up your portfolio with hydrocarbon names.
