Energy names should outperform in a market rout
Global energy shortages provide support
Yesterday’s market sell off is likely to be followed by more declines as the market wakes up to the facts that:
Inflation is rising, not falling
Higher rates will be needed to keep inflation from causing carnage, perhaps much higher
Sovereign debt is too high and there is little room for stimulus if the economy crashes
Housing prices are bloated and vulnerable to lower rates
American and Canadian policy-makers are doubling down on policies that are frankly stupid based on their delusion that CO2 causes global warming.
A recession is more likely than not.
In this situation, the global energy shortage will deepen absent a substantial supply response and none is in sight or likely. Natural gas is in a perilous shortage virtually everywhere and prices are at nosebleed levels in Europe and Asia making LNG exports from North America very profitable. That export demand will pull gas out of the domestic market making it even tighter than today.
There is little governments can do to increase energy supply by any material amount without embracing coal, oil and natural gas. Nuclear plants take decades to build, wind and solar are laughable in terms of their actual versus nameplate outputs, and are unreliable at best. The World Economic Forum, doubling down on its inane “Great Reset” rhetoric, is bitching that India, China, Korea, Russia and Indonesia are expanding coal usage, a trend that I expect to grow since coal is now competitive with gas and they simply need power. Germany has turned to coal to supplant its massive failed experiment with “renewables” with coal outpacing wind as Germany’s primary power source in 2021. Today, Germany is studying re-commissioning coal power plants to deal with the natural gas shortage exacerbated by theUkraine war.
Canadian companies likely to benefit from the natural gas shortage even in a deep and prolonged recession are Tournaline Oil (TOU.TO) Birchcliff (BIR.TO) Peyto Exploration (PEY.TO) NuVista (NVA.TO) and Advantage (AAV.TO). I have left ARC Resources off the list since its foolish hedging practices will throttle any benefits despite its outstanding natural gas assets.
Oil should continue to do well although the commodity price will plunge briefly in a recession, a knee jerk reaction I expect will not last as supply falls faster than demand with capital fleeing the space and no signs that the Biden or Trudeau governments will take their feet off the brakes they have put on these vital industries.
Markets are volatile and take no prisoners so it takes a calm and steady hand to navigate troubled waters. I will remain invested in energy but keep some cash as dry powder to take advantage of any collapse in trading prices of well managed energy names.
Hi Michael. Why are you more tolerant of PEY's hedges, than ARX's? PEY forward fixed for long periods, along with an expensive transportation contract that just expired yr end.