Sunday nights are rather quiet around my home. My daughter tends to pass out on weekend evenings (Thank goodness), and my wife is an avid reader. So, I usually take that time to dig into other passions or catch up on reading. I made the error of checking the futures market at 9 pm because I’ve been trading wheat futures since January. I wanted to see if another “Limit Up” session was coming. Sure enough, it did. Wheat continues to chug higher on concerns about supply out of Russia/Ukraine. Then I saw that oil prices ticked to $130 per barrel.
All I could do was scream: “Ooooooooooohhhhh…” There was another word at the end of that statement. One that woke up the four-year-old, and caused my wife to come running out of the living room. We’re officially in an energy crisis.
What Next for Oil Prices?
This weekend’s surge in oil prices is again caused by events in Russia/Ukraine. Now, the U.S. could see record gasoline prices (we’re pennies away), and airline companies are talking about raising prices to afford jet fuel.
The White House is planning to send representatives to Saudi Arabia to request that OPEC (the world’s largest oil cartel) increase output. The cartel has struggled to meet its production quotas, and even these higher prices can’t get people moving fast enough to get the crude out of the ground.
OPEC controls the global price. Hard stop. While the U.S. has achieved greater independence, we’re not completely dependent. We need more infrastructure, more workers, and more pipelines. We need more refining capacity as well. The news suggests that oil prices will continue to climb.
Reports indicate that Congress is on the verge of passing a bill that would ban Russian imports of crude. Based on my estimates, such a move would increase the geopolitical premium of crude by another $10 to $15. At that point, crude would likely settle in that $130 to $140 range. Most people argue that the U.S. could just pump our way out of this problem. Not so. It will take months for energy companies to bring certain fields on line. But that doesn’t solve the bigger issue.
Oil Production in the United States
In the U.S., the challenges remain the same. I’ve noted that a large number of producers are unwilling to increase production despite the financial incentive to do so. Even at $200 per barrel, some producers won’t increase their production. That sounds insane on the surface.
But these companies are so gun shy from the last time that crude oil prices hit $100 in 2014 that they won’t make the same mistake. Back then, these firms increased production, borrowed money, and started pumping crude. Then, prices crashed due to an oversupply. These companies burned their shareholders.
Now, shareholders demand that these companies use all their cash flow to either hike dividends or increase their buybacks. Simply put, it’s going to be a very difficult time for crude oil producers to ramp up production unless they borrow money to do so. And if that happens, share prices will fall.
Now, if you’ve been following me, you know that I’m bullish on Crescent Energy Company (CRGY). Shares are up nearly 10% since I started talking about the stock back at $15. This KKR-backed energy company will start to buy those energy companies that can’t pump yet have strong cash flow. Then, CRGY will turn those assets into cash machines. This is only the second inning of this company’s transformation.
Right now, market momentum is VERY negative. Today, CNBC said that investors shouldn’t short the market, but they shouldn’t buy stocks either. Well, that doesn’t make any sense. A lack of buying will simply bleed off, and the short sellers will be the winners. Heading into next Friday’s Quadruple Witching, the data and institutional order flow is highly negative.
I think that you could see a lot of companies continue to selloff, especially in the European financial sector. We still don’t know how exposed a lot of those banks are over in Germany, Switzerland, and England. There are sectors – consumer cyclical, technology, and communications – that are off big since the start of the year – and heading into the most volatile expiration period of the quarter, capitulation could become a problem.
I HIGHLY recommend that you remain liquid, hold cash, and look for opportunities in the sectors that are seeing inflows – energy, materials, and some utilities. That said, we are approaching gains on energy that some funds won’t see again for a decade. Profit-taking could happen at any moment. I expect a selloff in the energy space in the next nine trading days as some large institutions use their oil, gas, and other commodity gains to paper over any losses in other sectors.
This is a very tricky market. In the last three years, we’ve seen remnants of the 2008 crisis, the Dot-Com Bubble, the entire 2010s Bull Market, and now the late 1970s. Stick with me, and I’ll continue to guide you through this sea of noise.