Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long TXP.TO, POE.V, and TGL.TO
At some point, I’ll write a longer note on my broader market thoughts, but generally speaking they haven’t changed. I like materials (especially copper and nickel) and energy in pretty much all forms, with a shot of gold on the side in select stories where I think there’s value. The U.S. dollar index is under pressure and the reflation trade appears to be “on”. The market is full of liquidity these days and it’s looking through to the other side of COVID and it’s liking what it sees. Pent up demand, massive inventory restocking, infrastructure investment, and stimulative fiscal and monetary policies globally all bode well for materials and energy. It could be quite a party once the COVID cuffs come off. For those who would still poo-poo oil, my thinking on that sector is coming around to being quite bullish given the massive disconnect between energy stock valuations and the actual outlook for oil supply/demand in 2021 and beyond. If you haven’t noticed, the energy world has changed… and this time when prices are ripping higher as the world goes on a post-COVID party boat cruise, the big energy companies will be much slower to respond with supply. Things like dividends and debt repayment are now more important than production growth. Capital will be more constrained and cautious… and there’s less of it to go around because right now cash flows are still depressed. The psychological impact of what energy companies have just gone through will leave a mark on any oilman and that will keep capital budgets conservative for a while. Eventually, the whisky might start flowing and we drown ourselves in oil again, but first the boom. Anyone who’s been around oil for a while knows that the oil market is defined by boom and bust cycles, and we just went through a big bust. Like yin and yang, the boom will follow. EV’s? Yes, I know, they’re coming; but not in high enough numbers, and not soon enough in the emerging market economies that are going to rip higher on the back of a lower USD and higher commodity prices (never mind in the developed nations as economic activity ramps back up). For perspective, and I’ve said this before, the global EV fleet (every EV made to date) currently displaces around 1 million barrels per day of oil demand… that’s out of a market that is 100 times that size and has grown pretty much every year outside of ones like the one we just had. If the global EV fleet doubled next year (which it won’t, it might go up 50%), you might offset another 1 million barrels per day of demand, with no account for the existing natural demand growth in emerging economies. Given the current supply imbalance (we are cutting through OECD inventories at a good clip now), it’s looking like the world will be “obviously” behind the curve on oil production by mid-2021. The market is always looking ahead though… and if they are already ripping the cruise lines, Vegas, and airlines, how long do you think it will be until they start ripping oil again? Oil is dead? No, not yet… it’ll have one more chance to remind the world of its critical importance to our society. At least that’s my two cents on the topic…