power point
What we heard from energy stakeholders
open. Closed. under. above.
That’s the current rhythm in the Strait of Hormuz (SOH). This is also reflected in the subsequent movement of crude oil prices.
By the time you read this, the date may have already changed, so I’m almost reluctant to write anything specific here. But Power Insider needs to “print” (so to speak), so at some point you’ll need to call it and run it.
As I wrote recently, energy investors need to remain extremely nimble these days. The news doesn’t change every day, it changes from moment to moment. The fluidity of the situation is illustrated by the heading of US Central Command. The only time you can see these three is on Sunday.
The optimistic post arrived just after 8 a.m. ET on Wednesday.
A few hours later, things took a turn for the worse.
Less than five hours later, I actually felt better.
It’s almost impossible to keep up with the speed and direction of news. In recent days, more Iranian military attacks on ships around the world have hit Kuwait, including two attacks on UAE oil tankers, including one fatality, followed by news of President Trump’s 20% “security fee” proposal, which then fizzled out almost immediately.
By comparison, a 20% toll on a supertanker full of oil could cost more than $30 million. That would eliminate any profit or economic incentive to move cargo. For most shippers and oil companies, this fee was clearly unacceptable. And so it disappeared. 20% commission, we barely knew you!
So what is the current situation in the oil market? I laid out the case for both oil bulls and bears on CNBC TV this week.
Those predicting future price increases point to Iran risks, global inventory outflows including the US SPR, and a still strong global economy. OPEC has just released new economic forecasts that maintain the global growth forecast of 3.2%.
Low price bears also point to the release of global storage capacity to keep the market well supplied. They also note a significant decline in China’s oil demand and the increasing importance of the Russia story. Ukraine has targeted Putin’s oil refinery assets with long-range drone strikes. Damaged refineries cannot process oil. Since the oil cannot be refined domestically, it must be sold on the world market. This will actually increase the availability of Russian crude oil in the market, helping to ease the Hormuz-related supply slowdown (see RBI below).
Many of you may have supertanker questions. When will oil prices start having a major impact on stocks and macro markets?
Oil is already driving borrowing costs. Here in the United States, the 10-year Treasury yield has soared above 4.6%, and leading members of the Federal Reserve are arguing that rate hikes may be necessary to stem the rise in inflation.
This is part of a concise breakdown from the Deutsche Bank team.
“When the Iran conflict began earlier this year, we outlined a framework for thinking about what it would take to create a large decline in risk assets. To make a large risk-off move after an oil crisis, we pointed out three criteria to look for (e.g., a 15% decline in the S&P 500). Generally, you need at least one of the following:
1. Large and sustained oil price increase: A sustained increase in oil prices of at least +50-100% for several months.
2. Hawkish policy response: Shocks force central banks to take sharp hawkish turns to combat the resulting inflation (e.g., 1979, 2022).
3. Wider macro damage: The shock is large enough to push an already slowing economy into recession or cause a significant economic slowdown (e.g., the 1990 Gulf War).
But for all three of these criteria, today’s shocks do not meet them, and still do not, even after the recent oil price spike. ”
Not to be outdone, Jonathan Golub, a strategist at Seaport Securities, said the overall stock market remains cheap, in part because earnings expectations continue to rise. Currently, his forward P/E ratio is 19.5 times the S&P 500 index’s P/E ratio. Energy stocks make up only 3% of the S&P 500 index, but generate 5% of its revenue. Golub said on the show “Power Lunch” that energy companies’ revenues are expected to double. Companies like ExxonMobil, Chevron, and ConocoPhillips have been hit hard by rising oil prices, with earnings forecasts rising as prices rise. It remains to be seen whether this earnings optimism pays off. The market will find out in just a few weeks. Please circle Friday, July 31st on your calendar.
News moves fast. Stay focused. Stay agile. stay tuned. It feels like Holmes isn’t done with the headlines yet.
wall street view
While many investors remain focused on the latest developments in Iran, what’s happening in Russia is also moving some U.S. energy stocks. Ukraine continues to go after President Putin by attacking Russian oil refineries deep within the country. These drone attacks have caused prices for many refined petroleum products, including diesel fuel, to soar. The move is one reason stock buyers are flocking to U.S. refiners. Six stocks continue to set new highs. PBF Energy (PBF) has doubled this year, with Par Pacific (PARR) and Delek (DK) not far behind.
If you’re considering some of these stocks, you should use great caution. There are several stocks that are above Wall Street’s average price target. Empters beware!
We recently wrote about nuclear power and how it is returning to growth mode. One of the stocks we discussed was uranium producer Cameco (CCJ). Trust Securities has made positive comments on the stock price. Trust analyst Christopher Souther initiated coverage on CCJ with a Buy rating and a $129 price target. This is a whopping 40% increase from here. Souther said he views Cameco as a “high-quality, vertically integrated uranium platform with a favorable long-term supply and demand outlook and strong positioning for rising uranium prices.” He also said Cameco has undergone a “meaningful revaluation in recent years” and believes contract pricing will improve going forward, requiring higher multiples.
Speaking of power, let’s talk about Bitcoin-turned-AI power providers like TeraWulf (WULF). Easton, Maryland-based WULF is one of a group of companies that started out as Bitcoin power providers but have pivoted to powering AI. To be clear, these companies, TeraWulf, Hut 8 (HUT), Cypher Digital (CIFR), and CleanSpark (CLSK), may be lumped together, but they are not the same. The models are different and investors should look at and evaluate them individually and on their own merits. That being said, they all have a loose relationship in that they create power. This is the power required for large data centers and hyperscalers. These companies make money by entering into large, long-term contracts to supply electricity. TeraWulf just signed a massive 20-year, $19 billion (or more) deal with Anthropic. CleanSpark just signed a unique 20-year agreement with a major technology customer in Georgia. We talked to the CEO about it on CNBC. And a few months ago, Hut8 signed its own 15-year deal worth $9.8 billion.
Those gains didn’t discourage Stephen Byrd, Morgan Stanley’s star analyst. He remains “unabashedly bullish” on many of these stocks. His $72 target on TeraWulf means it could triple from here. His target on Cipher Digital is $48.50, more than double that. Part of the bullish rationale is that these mega-contracts that companies are signing should reset their valuations.
RBI → “Bitcoin-turned-AI-turned-power provider” is too lumpy and we need to come up with new names for these companies. We proposed it to you at X and you submitted some good and interesting ideas. Check it out.
If you’re bullish about data centers, there’s one big(ish) piece of news you should take note of. New York becomes the first state to ban new data centers. For at least a year. Read more of CNBC’s coverage here. So what should we do?
TeraWulf CEO Paul Prager issued a statement regarding New York State’s move on data centers, saying, “The executive order should provide greater clarity and a prudent, practical path led by recognized experts at the (Public Service Commission).” Prager went on to refer to one of his power projects in the state, saying, “Lake Mariner is operational, fully permitted and on track. It’s the gold standard for powered, ready-to-deploy AI infrastructure. And that (pause) does not change our expectations for Hawkeye Lake.”
New York is competitive and likes to be first. Let’s see if this kind of power move by a state is the first of its kind within the United States. Investors are paying attention.
Let’s take a look
Carlyle’s Jeff Currie explains why you shouldn’t just focus on oil prices.
inside line
This week’s Inside Line is David Crane. David is the current CEO of the investment platform Generate, has served as CEO of five publicly traded companies, and served as the Under Secretary for Infrastructure at the Department of Energy under then-President Joe Biden.
random but interesting
Russia’s energy infrastructure continues to be attacked by Ukrainian drones. Ukraine is not only attacking small Russian refineries near the border, but also hitting large oil facilities hundreds of miles inside President Putin’s territory. These explosions are forcing Russia to sell its oil on the world market, even as prices for products that Russia cannot produce (think diesel fuel) are rising when refineries go down. JP Morgan shows this in the chart below.
The Ukrainian attacks on Russian oil infrastructure that help stabilize prices are definitely random but interesting.
