The new year is not even three weeks old, and yet investors are already facing challenging conditions… and suffering losses here and there.
In the words of folk singer Sheryl Crow, “No one said it would be easy, but no one said it would be this hard.”
But hope springs eternal, and 2023 is a new and promising year. I’m not expecting big things from the overall market this year, but I am excited about select opportunities.
With that, I present to you my three power trends for 2023…
- “Old Energy” Still Shines
- “Greenflation” – Battery Metal Rush 2.0
- The Sleeping Dragon Awakens
Because each of these trends are so complex on their own, I’m going to examine them individually over the next few days.
Today, we’ll start with old energy, we’ll cover “greenflation” on Saturday, and we’ll round out the trifecta with waking the sleeping dragon on Tuesday.
Did you know that a tiny number of Americans quietly own the majority of all U.S. stocks? What do the wealthy elite know that you don’t? Click here to find out more.
2023 Power Trend No. 1: “Old Energy” Still Shines
In the most famous line from one of the most famous movies of all time, a central character says, “You’re gonna need a bigger boat.”
That movie, of course, was Jaws. And that memorable line from Chief Martin Brody (Roy Scheider) was stating a simple truth: Catching and killing the massive great white shark that had been terrorizing Amityville would require a lot more muscle than what the townsfolk had imagined previously.
The global energy transition is no different. We’re gonna need a bigger boat.
In fact, we’re going to need a lot more of every energy source over the coming decades to accomplish the transition from fossil fuels to renewable technologies.
“Old energy” will carry most of the load during the early years of the transition, as it guides “new energy” to the pinnacle of global power production.
Producing an electric vehicle (EV), for example, requires about twice as much energy as producing an internal combustion engine vehicle. That’s because EVs are essentially batteries on wheels… and batteries are basically just hunks of metal.
Mining and processing all of that metal demands a lot of energy.
To unearth enough raw ore to produce a single midsize EV battery, for example, mining operators must excavate about 250 tons of terrain. After that, they must transport roughly 50 tons of ore to various facilities around the world that can extract the targeted metals and then refine them to battery-grade standards.
With a few exceptions, every step of the process consumes some form of fossil fuel. Most other renewable technologies are even more energy-intensive than EVs.
Therefore, far from replacing fossil fuels, renewable energy technologies begin their productive lives by consuming more fossil fuel than legacy “dirty” technologies like internal combustion vehicles and natural gas-fired power plants.
In effect, renewable energy is the “trust-fund kid” of the energy world. It requires a lot of help from the prior generation before it is capable of doing things “on its own.”
Eventually, as sustainable energy sources become more ubiquitous and diverse, they will compound their success and pull themselves up by their own bootstraps.
That’s the endgame, obviously. But fossil fuels are still as popular as ever.
Global natural gas demand, for example, is hitting all-time highs, while crude oil demand is close to record levels. Even coal demand is hitting all-time highs!
Clearly, the existing combustion-powered paradigm continues to stoke demand for fossil fuels.
Here in the U.S., for example, crude consumption has finally returned to pre-COVID levels. Even more incredibly, China’s crude consumption is hitting record-high levels, despite the country’s three-year lockdown to combat the coronavirus.
And now that China is finally abandoning its “zero-COVID” policy and opening its economy, Chinese oil demand could soar.
Although U.S. shale oil production has been trending higher recently, it is barely above the peak levels it hit three years ago. Furthermore, despite the relative strength of shale production, overall U.S. oil production remains 600,000 barrels per day below peak levels.
In theory, the global petroleum industry could boost crude output significantly over the next few years. But very few oil companies are spending the billions of dollars needed to make that happen.
According to the International Energy Forum and IHS Markit, the world’s oil companies must invest $525 billion per year through 2030, just to keep pace with demand growth.
Instead, the world’s oil companies are spending about $500 billion less per year on exploration and production than they were in 2014.
To add perspective to these numbers, Rystad points out that for the first time ever, annual investment in oil and gas exploration last year fell behind global investment in renewable energy projects.
Despite this compelling array of bullish data from the energy industry, the oil price is not trading north of $100 a barrel. Instead, it has been treading water around the $80-level for about four months… and most oil stocks have retreated significantly from their 2022 highs.
Perhaps oil stocks “see” lower crude prices on the horizon… or perhaps they are simply taking a breather before attempting a fresh move to the upside. Whatever the case, several real-world gauges are indicating that crude supplies are relatively tight.
The chart below provides one insight into the current supply imbalance. It shows the level of U.S. crude oil inventories, expressed as “days’ worth” of domestic consumption. During the depths of the pandemic, this reading topped 33 days of consumption – the highest reading of the last three decades.
But recently, that reading dropped below 21 days, which is close to the lowest inventory levels of the last seven years. This low reading doesn’t mean the United States is running out of oil, but it does mean that demand growth is outpacing supply growth.
Bottom line: The global crude market features rising demand, coupled with uncertain supply. That’s a picture that should develop into rising oil prices.
I’ll be back on Saturday with details on our second megatrend, so stay tuned.
P.S. In the coming weeks, I’ll be unveiling a new project that has been years in the making… and that I am finally ready to show you. I can’t say much for now, but keep an eye on your inbox, as I promise that you’ll be the first one to hear about it. Until then, check out my latest Investment Report issue, where I give further detail on our new megatrends, as well as a few recommendations to go with them…