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For the past month or so we have been pushing back on the “oil glut” narrative and the pervasive oil gloom that has existed really since Liberation Day in early April of this year, which coincided with news of an accelerated unwind of OPEC quota cuts. Another week has gone by. We are now nearly at the end of September and firmly in the post summer, pre-winter “shoulder months” period for refinery runs that in prior periods of weak balances has seen crude soften. At least through the September 24th recording date of this video, crude oil prices are hanging in there around the mid-$60s.

This week we check-in on where traditional energy stands in terms of growth and profitability, which are the drivers of absolute and relative equity performance. As we have previously noted, the biggest challenge the sector faces is not unfavorable narratives from leading macro agencies or environmental activists, but a now nearly 2-year period of EPS underperformance and a softening in profitability metrics.

Our two key messages this week are (1) we believe we are now much closer to the trough of what we think has been a 2-2.5-year mini-downcycle following peak oil prices seen immediately after the start of the Russia-Ukraine War in 2022. and (2) As a result of where current profitability is and where we think it is headed in coming years, Energy should close the gap between its current discounted 3% market cap weighting in favor of its 5% earnings weighting in the S&P 500.

It remains our view that 2020 marked the bottom of a structural downcycle that began in 2008 and that 2025 will ultimately prove to be year 5 of a structurally better period for profitability that we expect to last through at least the end of this decade. We reiterate our long-standing call that the energy sector will return to a market cap weighting in the S&P 500 closer to its historic 8%-10% range.

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📜 Credits

* Intro & Outro music: Wolf Hoffman: Concerto for 2 Cellos in G Minor, Rv 531: I. Allegro Moderato.

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⚖️Disclaimer

I certify that these are my personal, strongly held views at the time of this post. My views are my own and not attributable to any affiliation, past or present. This is not an investment newsletter and there is no financial advice explicitly or implicitly provided here. My views can and will change in the future as warranted by updated analyses and developments. Some of my comments are made in jest for entertainment purposes; I sincerely mean no offense to anyone that takes issue.

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