Energy prices have been rising all year and energy stocks have beaten the market by a wide margin as a result. But the short-term dynamics driving oil and natural gas prices higher may not last long if investment in new production increases.
In this Motley Fool Live segment recorded on Oct. 14, 2021, Fool.com contributors Travis Hoium and Jason Hall discuss the current state of oil and natural gas prices and why it’s renewable energy that may be the biggest winner of the energy battle long-term.
Jason Hall: Travis, you know a little bit about the energy universe.
Travis Hoium: Yeah. This is an area that has been really interesting this year because I think there’s this short-term, long-term dynamic going on in energy right now, and it’s crashing into itself, if you will. Short-term energy up almost everywhere. I think that will probably be the case for the foreseeable future or over the next six to 12 months. But long term, there’s still a lot of structural challenges in energy. I wanted to share a few charts here for this works. If you guys can see this, so this is a lot of the same information that you shared, Jason, but this is the Natural Gas Spot Price and then WTI Crude Oil Spot Price. You can see both have been rising all year.
There’s a couple of reasons for that. One is demand is up on a monthly basis. Actually, August was the most demand for oil products that we’ve had since at least 2018 in a single month. All the driving that wasn’t happening during the pandemic is now happening again. Natural gas demand, maybe a little bit different dynamic there. Because if people are still here in their homes and things like that, but businesses when they will not open, we’re obviously not heating their businesses quite as much, maybe not quite as much energy usage. But now that is up as people are going back to work.
We’re seeing demand go up. Supply, not quite as much. Sorry, before we get to that. That increase in demand has led to energy stocks outperforming the market by a pretty wide margin this year. The S&P 500 up when maybe your tech stocks aren’t up. This is the reason why. But here what gets really interesting is that if you think about back in March to July 2020, energy prices dropped like a rock, I mean, oil was negative for a few days there. When demand is down, companies are going to respond and they’re going to cut their capital spending. We’re actually seeing the fruit from that right now. You can see that in the drop of capital spending for Exxon (NYSE:XOM), Chevron (NYSE:CVX), and Royal Dutch Shell (LSE:RDSA). This is something we’re going to see throughout 2021 for sure.
I don’t know that we’ve gotten a lot of capital spending estimates for 2021, but this is going to be an indicator of the supply side. We’re not going to have the supply to meet demand in oil and natural gas, and that’s why we’re going to have higher prices, at least in the short-term. It just makes me bullish about oil and gas stocks. Not necessarily, and here’s the reason why, if we look at our 10-year charts or pull this way back. Natural gas prices are up, but oil prices are actually down, and the reason for that is all of the things that are moving some of the most popular stocks in the market.
Electric vehicle sales are up. People are generally not consuming as much oil. Peak oil demand was in 2005. We are still nowhere near or we’re getting close, but we have not surpassed that today. Long term the demand trend doesn’t look great. Well, I’m spending most of my time looking in energy sectors and renewable energy. But this is a big reason why I’m not as bullish on oil and gas specifically right now.
Jason Hall: I think it’s an interesting dynamic, I’m going to weigh in, and before you pivot to your stock here, I’m just going to share another chart. This is since the beginning of 2020, you see the US oil and gas production, and this gets exactly to what you were talking about Travis. Those capital expenditures have been reduced. I think we are going to see a protracted period where costs are higher because it’s going to take time. I mean, we’ve worked through a ton of that inventory, that extra oil and gas that we have.
It’s going to take some time for the capital investments that are being made to pay off. It takes in some cases years right to bring production back and we’re looking at, if you go back to like 2014 when oil was triple-digits, for a year-and-a-half, and then fell into the twenties and then started recovering over the next year. Offshore investment basically stopped. I mean, we went through five years where offshore investment is probably down 30 to 40 percent from where it normally would’ve been. That was tens of tens of billions of dollars that was not spent to develop those resources that takes years to develop. There’s not a quick easy fix to this. Travis, talk about it. Go ahead.
Travis Hoium: To add to that. What I don’t know the answer to is, will there be an appetite to invest more now? I think investment dynamic has changed. You’ve had major pension funds. Large institutions say, we’re just not going to invest in oil and gas. Do these oil and gas companies just go, “Hey, commodity prices are up.” We’re going to take this cash and put it in our pockets rather than putting it back in the ground as they would’ve done basically at any time over the last 100 years. That may be a dynamic that’s changing.
Again, we’ll see what the capital spending budgets are for some of these big oil and gas companies. But in a normal year, maybe 10 years ago or 20 years ago, I would expect commodity prices to come back down because I would expect that investment to go back into producing more oil and gas. I don’t know that that’s the case today just because the investment landscape has changed so much for those companies.
Jason Hall: Yes. It has and number one, you’re seeing more discipline from a lot of the major producers. We’ve seen a lot of the poor companies have gone away and the bankers aren’t throwing money out there at those failed businesses the executives to try again. We’re not seeing that. Then to your point, the Rockefeller’s won’t own oil stocks. [laughs] That’s says a lot. That’s the appetite. What are you excited about? What are you interested in?
Travis Hoium: Renewable energy is what has really the momentum behind it. Wind, solar are the two main energy sources there. But there’s also a bunch of smaller industries that are growing behind that. In energy storage, two stocks that I wanted to throw out there, one is a little bit more established, that is First Solar (NASDAQ:FSLR). First Solar has been long and the most profitable company in the solar industry. They haven’t made quite as much money on each panel that they sell over the last few years as they did a decade ago. But there’s still churning out profits year after year. They actually have announced this year that they’re going to double production, which is the first time in a long time that they’ve been that bullish on the market. I think you’re seeing a couple of things there.
They have the most US manufacturing of any company. Most companies rely, at least in part, on China for some of their supply, and we’re seeing a lot of potential issues, if not, actual issues in the supply chain there for solar panels. First Solar controls its own supply chain. They’re winning projects in the US just because they are US manufacturer. They are going to expand that. I think that bodes well for their profitability going forward and they are very disciplined company as far as what they are investing in and what their return expectations are. The other company that’s a little bit more speculative but goes to that second layer is Bloom Energy (NYSE:BE). This is a fuel cell manufacturer, but they make solid-state fuel cell. They’re getting into electrolyzers.
If we need to store, and we do need to store energy for long periods of time, hydrogen is a natural way to do that. Bloom Energy is a leader in that space. There’s a lot of questions to answer in energy storage and hydrogen specifically. This is maybe a little bit like investing in the solar industry in 2000 or 2005. But I think looking 10-20 years out, that’s going to be an area that is going to be much, much bigger and that’s a leader in the space, so a company that I have a little bit invested in and really keeping an eye on what they are doing.
Jason Hall: I’m just going to second that on Bloom Energy because this is a company that I took a small stake in probably a little over a year ago now. Because it does seem like from a technological perspective, they have a little bit of an edge, but also, some things happened in the marketplace that really confirmed to me that I think they are in a great position.
If you look at all the things they have going on in South Korea, they have some major deals. They’re not the only one, but they have some major development deals in the works tied to their ability to produce energy and to produce hydrogen. It’s pretty powerful stuff. South Korea, because of where it is, does not want to risk being cut off from access to global energy supply. This is a big, important focus for that entire country, and some really big companies in that geographical area are partnering with Bloom to do stuff so I’m pretty excited to see how Bloom does.
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