Inflation is on the rise, with CPI finally reaching the Fed target 2% level. It is far from being problematic. Rising inflation is actually a good thing right now. It signals growth. It’s been a long time coming. Companies are starting to raise prices on goods and services, passing the cost increases to the Consumer. Energy prices are a big driver. Crude Oil is pushing $70, a 4-year high. Keep in mind, it’s nowhere near that $100 level. It is still significant in many respects.
Iran – Deal or no Deal?
The price of Oil has been rising ahead of the May 12 deadline for the US to make a decision on the Iran deal. Israeli President Benjamin Netanyahu said this week that the Iranians have been untruthful and have continued with its nuclear capabilities with plans for weapons. No surprise, the Iranians deny any such activity. President Trump has been critical of the agreement from the start. Iran could face sanctions which would reduce Iranian Oil in the Market.
Global demand continues to grow substantially with nearly 100 Million barrels of oil consumed daily. It has finally caught up with supply. The vast majority of the demand growth is coming from Asia. The US and Europe have actually been shrinking oil consumption the last few years. The US has also seen its production spike, which has helped keep prices lower and reduce dependence on foreign supplies. It has made a huge impact geopolitically. This cannot be overstated in its significance. Russia and Iran have suffered economically from it.
US Energy Renaissance – It’s working
The United States now produces over 10 Million barrels per day, making it the second largest producer behind Russia, knocking the Saudi’s to third. The US has nearly doubled its production in under a decade.
Iran, #5, produces 3.8 Million barrels per day. Texas now beats that, with 4 Million barrels, and growing. China is the largest importer of oil with 9.5 Million barrels purchased daily, a 20% increase from last year. China wants low Oil prices. Russia and Iran want them high. You can’t have both at the same time. Lower Oil prices have been a significant contributor to the US and Global economies.
American producers have strategically increased production while simultaneously reducing costs. The Permian Basin in West Texas is the most prolific play. I was in Texas again this week, visiting clients and meeting with Energy companies. Oil and gas production has skyrocketed since I began this annual trip 13 years ago. Technological advancements have made it possible and it’s driving OPEC and the Russians nuts. This is a very powerful development.
Beyond Crude – Renewable Energy
Renewable energy sources continue to make big strides around the world. Electric vehicles are leading the charge, and the trend should continue. Renewable energy accounts for over 10% of US consumption now. When you think Energy, you likely think of Texas. It’s not just oil and gas in the Lone Star State. Texas is also the largest wind-energy producer and the 2nd largest renewable-energy producer in the US. However, there still is no replacement to oil.
Our Energy investments have responded very well in early 2018, something that we anticipated last year, but were admittedly early. Crude is up just shy of 15% so far this year and Energy is the 3rd best performing sector. It’s been the top performing sector since the end of February rallying over 10% while all other sectors are actually negative (except utilities +5%). Showing some really impressive relative performance/strength, which we’ve been waiting for. We don’t see oil and gas as an attractive long-term investment and could very well be void the sector next year. Renewables are a very compelling long-term investment. They just haven’t worked yet. But for now, the world still runs on crude.
Have a nice weekend. We’ll be back, dark and early on Monday.
– Mike
