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  • Roger S. Conrad

Rock Bottom Prices Ready to Rise

By Elliott H. Gue on Dec. 31, 2020

The year just passed will go down as one of the most turbulent for energy investors. There were dramatic ups and downs for prices of the raw commodities, including a brief but for some devastating period of negative benchmark oil prices.

Share prices up and down the oil and gas value chain dramatically underperformed the broad stock market, even while anything smelling of renewable energy was bid to the sky. There were also more sector dividend cuts than any period in history, in large part because the year was a final reckoning for many of the companies launched during the IPO boom of the previous decade.

It was a year when many investors threw in the towel for oil and gas entirely. In fact, tax selling is likely responsible for stalling what had been a respectable rally from early November.

The industry’s long-term prospects have come under attack, as momentum for adopting ESG—environment, social and governance principles—picked up steam. And many began to irrationally fear a sooner-than-expected end to use of fossil fuels, in the face of aggressive measures to combat climate change.

Much of what happened to energy, of course, was the direct result of an historic pandemic that shifted consumer and business behavior sharply around the world, and for a time severely depressed energy demand. But whatever the cause of the damage, the result was a far different environment than what we envisioned a year ago, when we wrote that the wind was “very much at our back for energy stocks.”

Fortunately, there was a silver lining to 2020: These developments dramatically accelerated cyclical pressures that were already in play. And by greatly deepening the pain to investors in the near term, they’ve speeded up the timing of the bottoming process and eventual recovery.

Much more radical than expected cutbacks in energy sector capital spending are probably the single biggest change wrought by the pandemic. Reductions in CAPEX for producing oil and gas always lead to reduced production and therefore supply. And this time around, they’ve been accompanied by huge and immediate cuts in construction of new infrastructure as well—some postponements but also outright cancellations of major projects.

What we’ve seen was in large part a continuation of trends that were well in place years earlier. But now we’ve suddenly been catapulted months ahead in the cycle, perhaps even years. And at the same time, demand depressed by the pandemic is working its way higher.

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor