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- Three reasons why oil is staying below $100 a barrel.
- I can more easily make the case for $50 oil than $150 oil.
- Four stocks to own even if oil pulls back after Iran proved it can weaponize the Strait of Hormuz.
- An exclusive conversation with the CEO of one of the best-performing energy stocks this year.
(This is CNBC’s “Power Insider” newsletter, your inside look at the investments, people and companies powering the global energy industry. Click here to subscribe.)
POWER POINT
What I’m hearing from energy insiders
With so many problems still around Iran and the Strait of Hormuz, why are oil prices so far off from their recent highs?
It’s the question I get asked most often these days, which is generally followed up immediately with some version of “but there’s no way oil prices keep going down, right?”
My take → I assume these questions come from those who are quietly long oil and are shocked that crude is below $100 in the futures market.
Whatever anyone’s positioning, it’s a fair question: why is oil well off its highs? In May, crude had its biggest monthly drop ever. Yet the fighting is far from over. Iran says the U.S. broke the ceasefire. Its military is still lobbing missiles at U.S. forces in the Middle East. Yemeni terror group the Houthis are now threatening to jump in and harass ships in the area. Every day there’s a new source of worry.
So why is oil in the mid $90s and not well over $100?
Three primary reasons:
One: Real optimism that the Iran conflict/war is soon settled.
Iran needs oil because it brings in money. Iran has a massive economic incentive to get back to ‘normal,’ whatever that may look like. Iran is a petroeconomy. Oil and natural gas are its economy. Without exports, it goes broke. And without money, the people suffer more than they have in the last 30+ years. Even without weapons, those people will have a breaking point, as whoever is running Tehran right now is no doubt keenly aware. They want a fix to this, and hopefully one can come sooner rather than later. And I’m not a Pollyanna about this. I’ve been very clear in my reporting that things are far from peaceful with Iran and, given that there are very angry rogue IRGC bosses with access to weapons, it is entirely possible that fighting flares up again. If so, oil spikes again. The world turns on the day-to-day headlines.
My take → My sources continue to tell me that Iran still has a power vacuum at the top, and it’s probable the world will hear often conflicting comments and actions for the foreseeable future.
Two: China demand is falling.
JPMorgan star analyst Natasha Kaneva had an eye-opening note this week. She just got back from China and reports that she was shocked to see how much Chinese oil demand had been cut. She writes:
“We spent last week in China, and the most striking takeaway from our meetings was not simply that oil demand has fallen. It was that it may have dropped by as much as 9% or 1.5 mbd — abruptly, unexpectedly, and with remarkably little visible disruption.”
While 1 ½ million barrels per day may not seem like a whole lot, in a country with more than 1 billion barrels of oil in storage, it’s significant because it reduces the drawdown. It’s also roughly close to the same volume of oil that Iran historically exports each day. Kaneva notes that consumers and companies in China may simply be shifting toward more electrified options, such as EVs and subways, rather than gas-powered cars and trucks.
Three: The world is awash in oil … and more is coming.
So, back to the original question that I keep getting: where is the price of oil heading? While I appreciate the question – and the confidence – I have no idea. Smarter people than me have gotten it very, very wrong. Estimating oil price moves is a dangerous game. My friend, the late, great Boone Pickens, was often asked for an oil price target. He’d coyly give a range or a direction instead of a firm answer, saying something akin to “it’s likely to go down more than it’s likely to go up.” Classic Boone. So I’ll borrow his strategy. I can more easily make the case for $50 oil than $150 oil.
Here’s why.
As Kaneva laid out above, China is lowering oil demand. It also has more than 1 billion barrels in storage. Saudi Arabia is aggressively pumping oil through the East-West pipeline to the Red Sea. The UAE is fast-tracking a second pipeline to bypass the Strait. Now that it’s left OPEC, the UAE will also likely try to ramp up oil production. Venezuelan oil flows are on the rise, and Brazil and Guyana keep adding to volumes. And while oil demand is still growing globally, the pace of growth is slowing even as production is likely to go higher. Not to be outdone, U.S. production keeps slowly grinding higher.
There’s also the sizable matter of sales from the Strategic Petroleum Reserve. Emergency reserves from the SPR are being drained at 8-9 million barrels per week. This is a crazy-fast pace and, combined with the Biden-era oil sales, should put the reserve at its lowest level since it began filling in 1983.
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One last thing. Maybe it’s the long-lost trader in me, but markets seem to be itching to push prices lower. Every time we get a bump, oil prices move down. Thankfully, worst-case scenarios haven’t played out – and let’s hope they don’t. Even President Trump is talking about oil prices falling, speaking with my colleague Eamon Javers by phone this week and opining:
“I think the oil will be dropping like a rock in the very near, you know, the very near distance. I think oil is going to come down very much. You have 1700 boats right now that are loaded up with oil, and that’s going to be like an oil gusher. So I’m not worried about it at all, and the people understand it, and the only thing I care about, the thing I care about, I care about everything, but the thing I care about most at this point in life is that Iran will not have a nuclear weapon. And if they want to try and have a new nuclear weapon, I will blow them up to kingdom come.”
Not sure those are words that should soothe the market, and let’s be crystal clear: the Iran war/conflict may not be over. Stay hopeful, but remember that hope is not a strategy.
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WALL STREET’S TAKE
What if oil and bond yields stay higher for longer?
So what might this all mean for U.S. oil and oil companies? More long-term demand, writes the team at Barclays this week:
“Iran’s ability to re-weaponize the Strait and upend global trade flows is unlikely to be forgotten. Whether or not lasting peace can be achieved, we expect energy-importing countries to remain cautious of Middle Eastern supply and continue to favor the inherent security option of US supply by comparison.”
Mizuho says that even with ‘elevated’ commodity prices, there is still opportunity in some stocks, but you have to be selective. Mizuho’s team sees ‘dislocated valuations’ in large-cap, oil-focused companies and advises looking at some smaller names. They highlight Devon (DVN), EQT (EQT) and Permian Resources (PR) as top picks in that group. For a large-cap stock, the analysts at the Japanese bank like Chevron (CVX) and in refiners, prefer Phillips 66 (PSX).
Permian Resources isn’t a company Wall Street talks about much, but maybe it should. The Midland, Texas-based midcap has had a stellar 40% jump so far this year, and is up 55% over 12 months. Analysts love the stock. Of the 19 analysts listed by FactSet, 17 have buy ratings and just 2 hold. The average target price is $25.60, indicating nearly 30% more upside. Raymond James analyst John Freeman is the most bullish, with a $29 target. It also has a 3.33% dividend yield. The company is unique in that it has co-CEOs, both of whom founded Colgate Energy, which merged with another oil and gas company four years ago to form Permian Resources.
My take → For a $16 billion company, PR has a shockingly spartan website. We are about to find out if they like the media because my next call is to them to get them on my show Power Lunch or here in Power Insider.
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Outside of oil, the Middle East is critical to natural gas and LNG. With QatarEnergy’s massive Ras Laffan production complex hit by Iranian attacks back in March, the spotlight falls on U.S. companies to help fill production gaps. With that, Wolfe Research names Cheniere Energy (LNG) a new top pick. It sees about 30% upside in LNG, noting that the company has added ‘$5-10/share of cash value’ this year from high natural gas spreads. Wolfe’s Keith Stanley also believes any resolution to the Iran war will ‘counterintuitively be a positive that lets investors re-focus on long-term contract value.’
What’s interesting about Wolfe’s call is that Cheniere has tumbled about $70/share from its late-March highs, so the firm sees the stock returning to its recent level.
Cheniere’s average target price among all analysts is $303.45.
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TAKE A LOOK
Kpler Director of Commodity Research Matt Smith reiterates the view that this fight is likely not over.
watch nowVIDEO04:14Skeptical and not paying much attention to latest Iran-U.S. ceasefire news, Kpler’s Matt SmithPower Lunch
INSIDE LINE
This week’s Inside Line is with TeraWulf founder and CEO Paul Prager.
Paul Prager, CEO of TeraWulf.Courtesy: TeraWulfZoom In IconArrows pointing outwardsZoom In IconArrows pointing outwardsZoom In IconArrows pointing outwards
RANDOM, BUT INTERESTING
Power Insider is about all forms of energy, and this year, investors savvy enough to bet on that have profited handsomely. Here are this year’s top-performing energy and energy-related stocks with market caps over $1 billion. The winners range from LNG to A.I. power to batteries and fuel cells.
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THE GRID
Key stories for energy investors
- Trump tells CNBC: ‘I don’t care’ if Iran negotiations are over
- More than half of shadow fleet oil tankers pose environmental disaster risk (as I reported back in 2022 .. but worth another look four years later)
- China is always thinking long term: America’s LNG Boom Is Real — But China Is Planning Beyond It | OilPrice.com
- The other angle to higher gasoline prices: more tax revenues for states: Higher Oil Prices Will Likely Increase Severance Tax Revenues in Rocky Mountain States – Federal Reserve Bank of Kansas City
- Oh, Canada! Canadian Rig Counts: Oil Rig Count Now 51% Above Prior Ten-Year Seasonal High | RBN Energy
- Though Dark Side of the Moon and The Wall get all the attention, Pink Floyd’s Obscurred by Clouds remains an underrated gem. Here’s one of my favorite tracks: Pink Floyd – Childhood’s End (Official Audio)
Catch up with more on energy including interviews and video content from CNBC and Power Insider.
Read the last issue of Power Insider here: An AI trade involving energy and infrastructure that’s doubled your money, topping Nvidia
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