2023-04-17 13:38:53 ET
Summary
- Jay Hatfield, the CIO of InfraCap MLP ETF, believes we'll have a soft landing, and I don't disagree.
- Supply and demand balances in oil markets will be driven by the missing element of price in forecasting scenarios.
- Some midstream firms are falling into the CCS camp of the energy transition space.
- The latest EPA emissions announcement, which encourages earlier electric vehicle adoption, is likely not well aligned with market dynamics and the pacing of the energy transition.
- Once again, Texas holds some keys and lessons, and is an energy resilience pillar.
In a discussion with Jay Hatfield, the CIO of InfraCap MLP ETF (AMZA), we cover a range of market and economic topics spanning from oil markets and midstream to carbon and policy. Even in light of many commentators suggesting a tighter oil market in the second half of the year, AMZA's analysts maintain a $75-$95 range. Hatfield sees a soft landing for the U.S. economy, which he says is a bit contrarian to most pundits. He's likely not far off.
The oil market scenario of the Paris-based IEA suggests a tight market ahead. This estimate seems possible. However, Hatfield notes that price is not considered in the equation. His rule of thumb is that for each $5 price increment, one million barrels per day is affected. They has assumed in the range above that OPEC would be lending support, i.e., restraint on production.
The forecast by Hatfield and Co. makes sense given that the concern of inflation and interest rate hikes, with their recessionary potential, was one driver for OPEC's cuts. I'd call that softer demand, not necessarily short sellers' momentum. OPEC said they were addressing short seller's activity which was believed to be driving down price. OPEC managed their price conundrum with the production cut announcement.
Video link:
Energy Market Update Backgrounder
Hatfield also alluded to Biden's initial policy to reduce hydrocarbons, an early policy stance. That was the administration's position for a time until gas prices rose and a new reality set in. Hence the response of requesting that Saudi Arabia pump more oil, and then the SPR releases, whose effects show up in late 2022 and first quarter 2023.
As noted by Hatfield, we have never had a pandemic (in the last 100 years) where we had the many data points of modern markets and near-instantaneous communications methods. The pandemic effect is a remarkable outlier with respect to market changes - oil markets, geopolitical changes, upending a green energy revolution somewhat, supply chains' re-makings, and so on.
New Transition Happenings
While the impact of the Inflation Reduction Act (IRA) has been covered considerably in my videos and some articles, the Biden Administration has found another route to encourage its climate policies. The EPA just announced new emissions reductions for cars, essentially attempting to push EVs to market sooner than later. This is a mandate, not a market approach. It's an entirely long analysis as to why this is infeasible owing to market distortions and physics, but I do offer some superficial analysis in the video. And in the future, I will be discussing this on a May 10 radio show and podcast. It's the matching up of ambition and reality. Hatfield prefers a straight-up carbon tax to sort the matter efficiently.
While plug-in electric cars, hybrids and other fuel-efficient vehicles will be built, the road getting there is a bit convoluted with current policy incoherence. A clear policy with achievable and realistic plans is not eminent largely because of the interactions between the grids, minerals inputs requirements, and the sequencing of such a transition. The tech has to catch up. The market will move all of this over time.
The upcoming election cycle means that further policy actions will be limited. The market may offer more clarity too once interest rates have reached their crescendo and after-effects are digested by policymakers and markets. In the meantime, the midstream space is not overly swayed to the extent that producers are with the implications of the IRA legislation. They're more indirect beneficiaries through their oil and gas producer customers. Renewables firms and greener leaning utilities will benefit directly obviously.
Once again, Texas is applauded for its role in keeping energy supplies moving. The cooling of the fairly-hot Texas economy is likely a good thing. Such breakneck growth has limits. (See " Global Energy Transition: Soft Landings ..." Some of the results of the IRA legislation will take time to show, but firms' announcements indicate movement ahead .
For further details see:
Energy, Economy And Policy: Parsing Markets (Video)