Gas prices suck, but it’ll get better soon. None of this should be unexpected and Biden’s – or Trump’s for that matter – energy policies have had little to nothing to do with the pain at the pump. Instead, we’ve found ourselves in a perfect storm of capitalism, war, short-sidedness, and supply/infrastructure problems.
- Capitalism – The companies operating in the oil industry are in the business of making money, not finding ways for us to save a buck. They have to think about today’s operational succusses as well as positioning themselves for future industry trends and opportunities. I would argue that Chevron and friends are running their businesses well and I appreciate the significant stock/dividend gains over the last year. From a macro view, these companies know that EV cars are gaining in popularity and that governments everywhere are creating policies enforcing better fuel economy. Why would they invest in more capacity? Sure, the public is begging for more production, but that isn’t going to happen in any significant way. A good number of refineries were taken offline following the demand drop after Covid and the numbers have not returned. Smart.
United States Crude Oil Production
- War – Not much needs to be said here that isn’t already known. Russia is a fairly significant producer of oil and the war with Ukraine has disrupted the industry.
- Short-Sightedness – This doesn’t play directly into the prices we’re seeing today, but we’ve known for quite some time that we should work to get off of fossil fuels. The future will likely demand it.
- Infrastructure – This is the other well-documented influencer on oil. Everything from transportation infrastructure to the ability to get steel has changed the game. We’re even experiencing labor shortages through all steps of the process.
So, what does it all mean for what’s next?
Expect more pain… for now.
There isn’t much that can change the current environment. Increased demand will likely continue through August and we can’t magically start producing significantly more oil. I expect higher prices through the next two months, so just prepare for it. However, there are three factors that could help curb the trajectory or ever reverse it.
- Russian war with Ukraine ends or finds some point of clarity. Oil markets are not comfortable with the current environment and this piece of the puzzle needs to be resolved.
- OPEC could product more. Meh – we’ll see.
- Reduced demand. This seems the most likely near-term influencer on oil prices. Inflation is smacking us in the face and at some point, Americans (as well as the rest of the world) will start consuming less. A rollover in demand will drive prices down.
How I’m looking to invest…
Over the next month, I’ll continue to slowly move out of my energy plays (sold 1/2 my CVX last week). I’ll always have a core position for the dividends, but I’m ready to take some profits and look for other opportunities. I do think CVX and others will bounce back up through August, but I can’t imagine it’ll do much more than its highs from two weeks ago. No need to be greedy. I’m also considering taking on a short position in late August/September. If a recession is in our cards, I want to be on the short side of energy.