For Super-Spiked subscribers that prefer that written posts, we have included a lightly edited transcript of the video (blue download button below) along with a downloadable copy of the slide deck. WATCH the video on Substack by clicking the play button above or on YouTube (here). STREAM audio only on Apple Podcasts (here), Spotify (here), or your favorite podcast player app. DOWNLOAD a pdf of a lightly edited transcript and the slide deck using the blue Download buttons below. We recorded this video podcast on Wednesday, March 11. As we think everyone by now realizes, the Strait Hormuz is a critical bottleneck to not only crude oil exports from the region but also LNG from Qatar. We have no idea how long the current war will last. The longer it goes, the greater the risk of a painful energy crisis materializing. We do not think that fact is lost on anyone that is participating in or observing the conflict. In this kind of very acute situation, an energy crisis would be bad for everyone be it citizens, governments, and even traditional energy companies over the long run as whatever benefit accrues from short term price appreciation would likely be lost from future economic weakness. No reasonable person in and around the energy sector is rooting for war. Even if shipping were to resume in coming days or weeks out of the Straight, we suspect the realization of what has long been considered a “worse case” geopolitical risk for oil markets—and now LNG—will motivate countries to pursue changes that mitigate this risk of future disruptions. This week we have two key messages: (1) we revisit our “Super-Spike” oil demand destruction framework we first rolled out in March 2005 at Goldman Sachs. It was a career call for us. The basic points of our analysis we think stand the test of time. (2) we discuss various diversification opportunities that we think countries will or should take to reduce the risk of future disruptions long after this current crisis has hopefully abated. Subscribe to Super-Spiked to receive all content via email. Also available on https://veriten.com. SLIDE 1: Cover Slide SLIDE 2: Strait of Hormuz: Long-Term Impacts On Oil, LNG * How will it be secured in an age of drones? * Inverse COVID: Refreshing our oil demand destruction framework. * Baseload energy diversification opportunities: * US Natural Gas: Lots of growth, where to invest? * Coal: A base-load domestic fuel, why not an EU comeback? * Nuclear: Back in vogue, but how long to grow again in US/EU? * Considerations: (1) What’s real, what’s hype? (2) Where in value chain to invest? (3) Who do you trust to allocate capital? SLIDE 3: Revisiting Our Oil “Super-Spike” Framework Key points: * We used the US since it has sizeable demand and freely floating retail gasoline prices. * Wider economy structurally outperforms gasoline. * But that means a much higher nominal price is required to destroy demand versus a prior cycle. * Gasoline demand is highly inelastic. * Both absolute price and rate of change are relevant. How to read the table/graph: * The graph shows historic gasoline spending (demand x retail price) relative to personal consumer expenditures. * Retail gasoline price equals the crude oil price + refining margin (to turn crude oil into gasoline) + gasoline taxes + “all other” (retail margin + other costs). * The table holds retail margin plus all other as constant and shows sensitivities to varying levels of gasoline spending as a % of PCE and refining margins. Exhibit 1: “Super-Spike” oil demand destruction framework Source: Bloomberg, EIA, Veriten. SLIDE 4: US Natural Gas: Lots of Growth, Where to Invest? US natural gas markets have doubled over past 20 years and are on-track to grow substantially over next decade. US natural gas resource is plentiful; infrastructure-enabled access to higher-valued end markets is critical. Exhibit 2: Global demand for US natural gas Source: EIA, Veriten. Exhibit 3: Gas value chain CROCI Source: FactSet, Veriten SLIDE 5: Coal: A Baseload Domestic Fuel, EU Comeback? Growth in coal in China has swamped the reduction in EU and US coal use. We see no reason the EU & US could not, at a minimum, reverse the declines seen over the last 25 years. It’s a drop in the bucket! Moving factories from the EU & US to China is net negative for carbon emissions, geopolitical security, and labor markets in the EU and US. Exhibit 4: Size of global power markets Source: Energy Institute, Veriten Exhibit 5: Growth in coal consumption Source: Energy Institute, Veriten SLIDE 6: Nuclear: Back In Vogue, But How Long To Grow? Nuclear is again recognized as an important baseload fuel that can favorably add to system diversification. China is growing rapidly versus stagnation in the US and decline in EU. What opportunities exist to improve execution in the developed world? What is the viability (vs hype) of advanced technologies to boost growth? Exhibit 6: Nuclear generation by country/region Source: Energy Institute, Veriten. ⚡️On A Personal Note: 21 Years Later… 📜 Credits * Intro & Outro music: Wolf Hoffman: Concerto for 2 Cellos in G Minor, Rv 531: I. Allegro Moderato. * This episode of Super-Spiked Videopods was edited and produced by Veriten Productions. ⚖️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. This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit arjunmurti.substack.com
