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The Ramp-Up Has Begun

Written By Christian DeHaemer

Posted September 19, 2023

This morning I was Slacking my good friend Jason Williams, the dynamic editor of The Wealth Advisory, when he sent me this chart, which paints the story of today’s oil market. It's a capex chart that shows how much money companies spend on maintaining their seed corn.

As you can tell, the energy sector has been out of favor while the technology sector has been all the rage:

OIL Capex
The thing about investing in general and contrarian investing in particular is that stocks, sectors, and indexes have a way of reverting to their mean. What once was first will later be last. You may remember my article on sector investing from last week.

This is very true of energy stocks. They have had a terrific rally since oil went negative on April 20, 2020. Blue chip oil stock ExxonMobil (NYSE: XOM) has climbed from $33 a share to $117. Diamondback Energy (NASDAQ: FANG) went from $26 a share to $156 a share. Range Resources (NYSE: RRC) went from $2.68 to $31.45.

Those are impressive gains, but that capex chart tells us it's just getting started as we are just off a decade low. But first let's look at what happened in 2014, the year spending on oil died.

Oversupply

The oil crash of 2014 was caused by oversupply. First, banks were all-in on the fracking revolution, giving loans to anyone who could jam sand down a well. The problem was oil companies had to keep pumping oil no matter the price in order to service these loans.

On top of this, OPEC decided it was a good time to fight for market share. It increased its output from 30 million barrels a day to 31.5 million. The idea was to drive all the U.S. frackers or their banks into bankruptcy.

You may remember that the U.S. ran out of oil storage so Wall Street leased out oil tankers just to fill with oil and sit at anchor.

Oil eventually hit bottom in the spring of 2016 at $25 a barrel before climbing back.

Underproduction

They say the cure for high oil prices is high oil prices. When everyone is making money, they will overproduce. That’s what happened. The opposite is also true, and that is where we are now. OPEC is cutting more than 1 million barrels of production a day. The U.S. banks have been reluctant to give loans to wildcatters, and oil companies everywhere are been saving money instead of spending it.

That brings us to the here and now. WTI crude climbed again over the weekend to $92.33, and Brent crude is even higher at $94.57. This is the third week energy prices have been higher.

Part of the surge in pricing has to do with China’s recent industrial output report, which showed faster-than-expected growth in August. China has moved to jump-start its economy by lowering the reserve ratio for banks, which aims to increase liquidity in the system.

I maintain that the Saudis are the best oil traders in the world. Their gambit to increase market share and hinder U.S. production worked. They have now gone the other way and stalled their own production in order to jack up prices.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.

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