There is no sector more unloved than energy. The relentless bear market forced oil companies to slash exploration projects. We believe this could lead to an unforeseen supply crunch in 2021 as demand surges as global economies recovers.
Can governments print endless amounts of money without causing inflation? Not usually. However, they did get away with it (for the most part) during the 2008 crisis. Back then, the money stayed on bank balance sheets, mostly. This time, the money is entering the system, and there is a lot more of it. This could lead to a perfect storm for higher oil prices this decade and perhaps a generational buying opportunity in stocks.
THE RETURN OF INFLATION
The last time inflation was out of control was during the 1970s. In an inflationary period, investors flee fixed income for assets with inflation protection (real assets and commodities). It does not make sense to be locked into a Treasury yielding 0.7% if inflation annualized is much higher. As a result, investors flee stocks and bonds for hard assets.
I believe the annual inflation rate exceeded 8% in the 70s. By 1979 nobody wanted to own Stocks or Bonds – no matter what they were yielding. Treasuries were considered “certificates of confiscation.” BusinessWeek’s August 1979 issue was titled: The Death of Equities – how inflation is destroying the stock market. At that time, 30-year Treasuries were approaching yields of 10%…no one wanted them (sound like energy today). That period turned out to be a generational buying opportunity for both stocks and bonds.
IS INFLATION DEAD?
Fast-forward 40-years, and here we are again. However, this time the opposite is true. The April 22, 2019 issue of BusinessWeek asks – Is Inflation Dead? with an image of a deflated Dinosaur, i.e., energy. Could this be another contrary indicator? I believe it is, and I think we are on the verge of a new inflation.
The Bear Market in Energy
Energy has been in a terrible bear market for over 6-years. Producers cut their drilling and exploration projects to almost nothing. Remember, it takes several years from the time of discovery to create a producing well. As demand returns, I believe a lack of supply could lead to shortages later this decade.
The global pandemic has reinforced the need to secure supply chains. A global rebuilding effort will result in massive onshoring projects of critical supplies. The infrastructure required and retooling will require a tremendous amount of fossil fuels. Ultimately, I think oil will reach new all-time highs in the 2020s.
Conclusion: Oil is one of the most valuable commodities on the planet. Without energy (oil, coal, uranium, and natural gas), the world would stop. It is essential to everything we do. I do not see how we can have inflation without much higher energy prices. Consequently, I am betting big on an energy comeback.
I started buying energy aggressively in October 2020. Prices could dip a bit further, depending on the elections and more lockdowns. I will continue to accumulate if prices decline.
AG Thorson is a registered CMT and expert in technical analysis. He believes we are in the final stages of a global debt super-cycle. He posts daily updates to Premium Members. For more information, please visit here.
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