Pending Energy Crisis

After the US government/Fed money bazooka in 2020 and 2021, people lost their minds and went all in on garbage SPACs and investing in stuff that people don't need: crypto mining, fintech fantasies, EVs, etc.  The drop to negative oil prices created an illusion that oil demand had peaked and energy was plentiful.  Energy is only plentiful when you have hamfisted lockdowns.  In an normal environment, there is just not enough energy.  

After the brutal oil bear market in 2015-2016, capital expenditures at oil and gas producers were pared back to historically low levels, which became even lower after the lockdowns of 2020.  All the while the government kept printing enormous gobs of money in various forms of pork stimulus and helicopter drops.  People with lots of money, with no corresponding increase in productivity, speculating in bitcoin and FANG stocks, while energy companies battened down and spent as little capital as possible, trying to just survive.  Those are your ingredients for a future energy crisis.  And we are getting closer to the beginning of that energy crisis.

People forgot that the emerging markets still have a voracious appetite to increase their energy consumption, as its the quickest way to economic growth.  India, China, and Southeast Asia are still growing, they have hundreds of millions living in poverty that are working to increase consumption of goods and services, all of which require more energy.  For them, net zero and climate change are rich country problems, not something they can afford to worry about.  

As the US and Europe are shutting down their refineries, the Middle East and Asia are building new ones to satisfy the demand for diesel and gasoline.  The energy policy in the US and Europe, with its focus on renewables and its fantasy about peak fossil fuel demand, have resulted in a shortage of refinery capacity, leading to huge crack spreads and diesel prices that would normally happen with crude oil prices over $160/barrel, not $120.  

The shutting down of nuclear plants and replacing them with wind and solar has been a key factor in the huge demand growth for nat gas as a fuel source for power generation, even while the government makes it hard to build more gas pipelines out of existing gas fields, which are limited by midstream infrastructure, not production capacity.  

Above is a chart of global oil inventories, with Q2 shaded.  Q2 is normally a time for oil inventory builds, as its the shoulder season with refinery maintenance and less discretionary driving and heating needs.  But despite the China lockdowns (China oil demand decreased more than Russia oil exports decreased over the past 2 months), there have been oil inventory draws.  It is amazing to me to see net US inventory draws in Q2 despite SPR pumping out 1M barrels/day to try to balance the market. 

Even with the right government energy policies, it wasn't going to be easy to supply enough oil and gas to meet growing demand, but with the obsession over renewables and marginalization of future oil and gas production, as well as nuclear, the policy makers have exacerbated a bad situation and made it catastrophic.  The inventory declines in oil and seasonally low levels of nat gas in storage are huge warning signs that this is a long term problem, something that's not going to be fixed by SPR releases or additional production from OPEC+, which is pumping near total capacity.  It can only be ameliorated by aggressive oil and gas exploration and capital spending to increase production, which will only pay dividends several years later, due to long lead times.  Shale oil production has peaked, and it was never a long term solution anyway due to low recoverable reserves and high decline rates.  

We've had warnings from MSFT and TGT, and INTC talking down their quarter.  All in the past week.  And we're not even in the heart of Q2 earnings warning season, which is late June.  The market has traded sideways and have bounced back after these bad news announcements, but what's more important is that the market is wasting time during this rally window to get to higher levels.  In a bear market, there is only so much time that the market can rally before the bearish forces return and the predominant trend continues.  There was a lot of carnage in April and May, so it makes sense that there is a countertrend rally and a period to consolidate the losses, but that reprieve won't last much longer.  I give it until the FOMC meeting next Wednesday, and then things should get shaky again for this market.  Seasonally, things are weak after triple witching opex, and that's coming up starting next Friday.  

I am looking to put on shorts if we get a rally after the CPI number is released tomorrow.  Target for short entries are between 12800-13000 in NDX.