Regular readers know we've written extensively about the coming boom in energy...
During the 2010s, the U.S. initiated one of the great investment booms of our time when oil companies perfected hydraulic fracturing ("fracking"), which allowed them to extract large amounts of oil and gas from previously depleted fields in the U.S.
What had previously been an expensive and perilous activity across the world was now in our backyard. Instead of offshore rigs in West Africa, oil companies could drop a rig on a farm in West Texas and generate a superior return.
The result was a massive investment boom, with energy companies investing all of their cash flow into generating new production...
The resulting oversupply, while good for America, crashed the price of energy and bankrupted many energy companies. This led to the replacement of "drill, drill, drill" management teams with bean counters who promised, during boom times, to return cash to shareholders rather than overinvest.
As a result, while energy prices have been strong in recent years, there hasn't been enough investment to meet the world's demand, which means that prices are likely to go up. And if they do, energy stocks will go up even more...
Plus, the commodity curve is in 'backwardation'...
In the commodities markets, everything – everything – is traded as a "future." This is a standardized contract that specifies the type of commodity, the date, and place of delivery.
There are actively traded futures for delivery every month, long into the future. This is called the "commodity curve."
In normal circumstances, the curve slopes upward. That is, the price of a commodity in the future is higher than the price today. This can be due to a variety of reasons, but the most common one is the cost of money.
With inflation, $1 today should be worth more than $1 in the future, so the same should be true of a commodity that is priced in dollars.
When supply is abundant, the curve can get very "steep." When millions of barrels of oil are looking for a buyer and need to be delivered on a specific day, the oil for immediate delivery can trade at a huge discount to incentivize buyers to store it. This is what happened in 2021, when the price of oil briefly went negative.
When the commodity curve is upward-sloping, it's called "contango." It's the normal condition for the curve.
However, the opposite can also occur – for example, if there's a short-term supply disruption, like the war in Ukraine and resulting sanctions on Russia.
This is what's currently happening in the oil market, and it's called "backwardation." Take a look at the current oil curve through 2030...
The commodities future market is saying that the exact same barrel of West Texas Intermediate ("WTI") oil delivered at the exact same place will be worth $20 less at the end of the decade.
We have a very different view, based on our analysis of the management teams and capital expenditures of energy companies. Having been burned in the past by so many boom-and-bust cycles, companies are limiting their investments in bringing new supply online, which will keep prices high for many years to come.
If we're right, this will mean much higher share prices for energy stocks.
But we do have one extremely important caveat to note...
Russia's invasion of Ukraine caused oil prices to spike in the short term, but they've now fallen below pre-invasion levels as the markets adjusted and investors are now focused on the possibility of a recession.
But oil prices could fall even further, however, if I'm right that Ukraine will win a decisive victory on the battlefield this summer – sooner than anyone else expects – and Russia will be forced to sign a peace deal ending the war. If this results in Russian oil and gas coming back onto the world markets, energy prices – and stocks – could face short-term pressure.
We think this would be a generational buying opportunity.
Over time, the end of the war – combined with normal economic growth – will drive greater demand for energy while supply issues remain, making our thesis come true even faster.
Be on the lookout for an opportunity to load up on high-quality oil and gas stocks when the Ukraine war comes to an end – which, to repeat, it likely to happen far sooner than anyone expects.
From Louisiana to Alaska and Maryland to Texas, a massive 'reset' is underway here in America...
I believe early investors could make 1,000% returns, while those who sit on the sidelines will be left behind – perhaps for good. That's why I recently hopped on a plane and flew halfway across the country to break down this situation into the simplest terms possible.
This is a game changer for the world. It has already paid off with 1,000% returns for savvy investors who got in early. And I think we're setting up for similar gains this time around. Get all of the details by clicking here.
Regards,
Whitney Tilson
May 16, 2023
