Oil - Self-fulfilling Cycle (6 month follow up)

Macro Perspective: Wed 24 Nov 21

As we discussed yesterday, the big tech trade has run into what looks like a catalyst for some unwinding. The catalyst being the re-nomination of the Fed Chair, Jay Powell, which confirms a new tightening cycle for interest rates.

We ended my note by looking at the key technical reversal signal on the Nasdaq chart. We now have the same signal on the S&P 500 chart - of course, both are heavily weighted and influenced by high growth tech.

Why don't high growth stocks do as well in rising rate environments?

Higher rates tend to bring about lower valuations. When Wall Street analysts start plugging in a higher discount rate (interest rate) into their cash flow models, they will get a lower price target (in some cases, much lower). Now, with this said, this should further confirm the shift in market focus to Value Stocks.

Among the most interesting value stocks, we've talked a lot about the beaten down oil and gas sector. With that, I want to copy an excerpt from my note from six months ago (21 May 2021) on the oil situation with a follow up chart below.

The globally coordinated "Clean Energy Revolution" promotes higher oil prices, not lower - that's the structural driver for oil prices. Funding for new exploration has been choked off, putting foreign oil producers in the driver’s seat. That movement is underway and these producers will command/demand higher prices, especially in a less competitive, lower supply world.

As we discussed this dynamic back in February, I said "get ready for $4 plus gas." With the monetary and fiscal backdrop that has evolved, and the inflationary pressures already bubbling up, it will probably be more like $6 gas. It will be self-fulfilling, and yet it will become the justification for the move to "clean energy" (just as high gas prices were in the Obama era).

So, this has all come to pass. Yesterdayday, in an attempt to bring gas prices down, the President announced that he will be releasing oil from the Strategic Petroleum Reserve.

This only further solidifies the trajectory of oil prices (up).

Not only have U.S., and much of the world, committed to defunding new oil exploration, and regulating down domestic supplies, they are now (adding insult to injury) drawing down their reserves.

OPEC+ countries will be even happier now to sell us all the oil we will need (until we are all driving Teslas) just at higher and higher prices. Will U.S. domestic oil producers be able to survive this planned supply destruction of the fossil fuels industry. 

On the latter, these remaining domestic producers have become cash machines, producing at wider and wider margins, and distributing the cash to shareholders.