00:00 One of the shifts that happened as a result of higher oil prices is sticky inflation expectations. We saw the long end of the yield curve go up, but on top of that, expectations for a Fed hike have risen dramatically from basically zero to now 30% by year end. And so the question is why are markets not yet — or perhaps they are — where equity markets in particular are not yet pricing in the chances of a hike? The last time this happened in 2022 when the Fed hiked, stocks really didn't like that.
00:33 Yet, again, all-time highs. >> Well, I just think there's so much momentum, so much money that's coming into the market, but you add up these things and that's certainly a negative and the oil price surge we've had is a negative and particularly if it continues to go higher, that's a negative and we talked about this tremendous amount of supply that's coming from these IPOs.
00:54 At some point, you get enough straws that it breaks the camel's back. But one on its own, I don't think just the Fed hiking one time would be that deleterious to the market. So I think that's kind of a sideshow, to be honest with you. I think what's happening in the energy world way outweighs the Fed, though it could cause the Fed to tighten a lot more than one time if they really feel like this energy crisis is here to stay.
01:19 And that's why I think this is such an underappreciated aspect and I guess before we go to gas, I just want to point out this chart again from Cornerstone, Mike Rothman. We're now in basically week 13 going to 14 of the shutdown and what you can see if you look at this far right column toward the bottom — this is basically a billion barrels that we've lost.
01:39 And it looks like it's headed to a billion and a half. And again, at some point — the market can ignore these things for a while, but at some point reality bites, and bang, bites hard. That just shows what I was saying earlier about $80 is the projected price by December. What's interesting, too, is we're not getting demand destruction yet.
01:57 Flight data continues to be quite strong. And that's really what's going to have to happen, David — because the shortage is so acute, you're going to have to have a major price spike so that you do get demand destruction until the supply can come back online. But the problem is — this is from Morgan Downey's brilliant little book Oil 101.
02:16 Global oil demand has only contracted year-over-year four times in the last 160 years. One of those, of course, was during COVID when the global economy is basically shut down. So, I won't belabor that. I already made that point. The Permian is trending down in production. That's huge because that's been the main source of US shale growth and US shale growth has been almost all of the global supply growth.
02:37 Then you had a collapse here in oil inventories. But what I really want to do is get to the — well, this is a positive. This is something that should be noted, which is the global economy is much less oil intensive than it used to be. So, that's the positive. I think the flip side of that is the developing world, of course, it gets more affluent and they obviously use more energy.
03:00 So, you're still seeing the demand for energy going up. But let's go to gas. Hitting the gas. So, we talked about this already, these data centers. I don't know if you know these numbers. They're pretty staggering if you really drill down. So, these are the ones that are under construction right now. It's going to require 37 gigawatts of electricity.
03:17 And I'll put that in perspective. Each one of those is equivalent to a large-scale nuclear plant. It's an enormous amount of energy needed. And then another 146 were the ones that are under firm commitment. Again, I think a lot of those under firm commitment are going to get canceled because there's just not going to be enough energy for them.
03:34 But it is a staggering amount, even just if you cut that in half and say, "Well, 90 of these will get eventually built." Or it's going to require 90 gigawatts. Here's what's — talked about this a moment ago. What's happening to electricity prices? They're starting to go postal. That's not very popular with the voting public.
03:51 So, nukes. A lot of talk about nukes being fast tracked and I'm a big believer in nuclear energy and there's a renaissance going on. I'm an investor in a couple of these small reactor / micro reactor companies, but really for the next few years gas is the only viable solution and it's cheap. So, what this shows is the discount of US gas to the global market.
04:12 And those are LNG prices in either Asia — Platts is the Japan, Dutch TTF is Europe. But you're talking $16–20 per MMBTU, which is loosely equivalent to a gallon of gas. It's actually — there's about 1/6 as much energy in a gallon of gas as there is in an MMBTU.
04:34 I'm sorry, the other way around. It's six times more energy in a gallon of gas. But the point is that our gas prices are deeply, deeply discounted. As Gary and Rosenzweig says, it's a 90% discount. US gas is a 90% discount to international prices. That's just not going to sit. That's just way too big an arbitrage.
04:52 And then you look at — how are people positioned? Are they overly excited about it? No. The red line shows that actually you've got bearish positioning in US natural gas. And then if you look at Europe — I don't know if you're aware of this David, but you probably are cuz you study these pretty closely — but unlike after Ukraine where Europe built up a big gas storage amount, they've let their storage go down and down and down.
05:16 They've been way too complacent. And then we've got — we talked about this a little bit with Qatar. 20% of global LNG is now offline. It gets very little press and these facilities have been severely damaged, so they're likely to be offline for an extensive period of time. So, you think about it.
05:34 Okay, there's not enough LNG in Europe and Asia, so they're going to have to take more US LNG. There's a number of US LNG export facilities — gasification facilities — under construction. So, that's going to be a huge demand for natural gas. Then you got the data centers, then you got gas still trading in the threes.
05:50 I think people going to look back and say, "What was I thinking? How did I not load up on natural gas at that point?" >> If you liked this clip, then like the video and share it with your friends. And if you want to watch the entire full-length long-form video, then check out the link in the description down below.