An Oil Rant & A Quick Update On Sable

Crosscurrents In The Oil Market, Two Podcasts Worth Checking Out & A Trade Update

I know I typically share a couple podcasts each week, but I wanted to take a bit of a different slant to my typical Sunday post. I was thinking about oil in general after my offshore oil services post from Thursday, and I figured this would be a good follow up. There are a lot of moving pieces as far as geopolitics and financial markets right now, and I don’t think I’m the only one trying to work my way through the information overload so far in 2025. I also have a trade update on Sable Offshore SOC 0.00%↑ below.

Oil: Putting Together The Puzzle Pieces

I haven’t made it any secret that I’m a long-term bull on oil prices, but the consensus narrative around oil right now is anything but bullish. As far as I can tell, the bearish arguments are typically some variation of three things: a recession is on the way, the chart looks like crap, and/or OPEC is bringing supply back online. Some people talk about “drill, baby, drill”, but unless something major changes, that’s more of a political slogan than anything that will have a long-term impact on the price of oil in my opinion.

Whether we get a recession or not is up for debate, and I think we get a recession in the DC area (go watch my podcast with Veles and the part where he talks about the DC housing market), but the rest of the country and the economy will muddle through. On the other hand, when you have Scott Bessent talking about a detox period, and a focus on shifting the economy away from government spending towards the private sector, it spooks some investors. As far as the oil chart goes, I’m not an expert and even I could tell you it looks ugly. The oil price is down 8 weeks in a row, but they say a picture is worth 1000 words.

On the OPEC point, it is true that they are planning to start bringing supply back in April. They are starting with roughly 140k barrels a day with plans to work their way back up to 2.2M barrels a day by 2026. There was some talk that the planned production increases are not set in stone, but I guess we will find out. It is interesting that the same people that said OPEC cuts were bearish because of weak oil demand say that OPEC increasing production is bearish because of additional supply, but what do I know. I do think that the OPEC production increases coming shortly after the recent meeting between Russian and US diplomats in Saudi Arabia is not a fluke, but I think it could just be an offset to other things going on in the oil market.

The Middle East geopolitical situation hasn’t been getting much airtime (other than what is happening to civilians in Syria), but I have heard from a couple people that follow it closely that they think we could see things get interesting in the Middle East in coming months. Trump hinted that something is going to happen to Iran regarding their nuclear program “soon”, and on the oil side, and Scott Bessent talked about the plan for sanctions on Iranian oil.

The U.S. is deploying sanctions against Iran aggressively for “immediate maximum impact,” Bessent told the Economic Club of New York. Trump’s goal is to slash Iran’s oil exports of 1.5 million barrels per day to a trickle, the Treasury secretary said.

So that could put a dent in the 2.2M barrels in planned production increases. The other country I want to talk about is Venezuela. Chevron has already been ordered to wrap up their operations in Venezuela by April 3, and it looks like they might not be the only company pulling out of the country. What that does to oil production in Venezuela remains to be seen, but the state oil company doesn’t exactly have a great track record. Oil produced in Venezuela does tend to work well with US refineries, but I’m curious to see what happens there. It is an interesting contrast to the Monroe Doctrine theme that we have seen so far from Trump. In China, you have stimulus, but you also have tariffs and other crosswinds.

China Vs The Oil Market

The post above is worth a read regarding China and oil specifically. As far as other things that are interesting for oil, there are a whole bunch of different pieces that I think are worth highlighting. The first is that sentiment and positioning is basically back to where it was at extreme negatives in the past. Another thing is that the Frac Spread count keeps dropping (down 53 in the last year from 263 to 210). Other people are more qualified to talk about efficiency gains, and other reasons why oil production could continue to grow from here while spreads decrease, but I wouldn’t be surprised to see spread count decrease from here with oil below $70. Global oil inventories are the lowest they have been since February 2013, when oil was at $110. We also have the potential tailwinds from an SPR refill, which would take at least 5 years, but Energy Secretary Chris Wright is apparently “dead set” on refilling it.

"By historical standards, oil today is extraordinarily undervalued. We have tracked the long-term gold-to-oil ratio going back to 1858, and the average relationship over that span has been remarkably stable: one ounce of gold has historically purchased about 20 barrels of oil. At present, however, an ounce of gold buys 43 barrels—putting oil at one of its cheapest levels relative to gold in more than a century and a half."

- Goehring & Rozencwagj Q4 2024 Commentary

I also wanted to include a quote from the Goehring & Rozencwagj Q4 2024 commentary, which is definitely worth a read if you have time. I know that the gold to oil ratio is not a timing mechanism, and there are a lot of sharp investors that think the gold to oil ratio is going to keep getting more extreme from here, but I think it’s another interesting data point. This is not to say that I’m bearish on gold. I think gold is probably going to $5,000 an ounce in the next two to three years. That could be a lowball estimate depending on what happens with the financial system and gold being remonetized.

Even if the ratio stays near all time lows, that still puts oil in the triple digits if gold is pushing $5,000 in a couple years. Is it possible that oil goes nowhere while gold keeps making new highs? Yes, but I find it unlikely. Gold tends to lead commodities bull markets, and if oil tends to wake up roughly 18-24 months later, 2025 and 2026 could be very interesting for energy. I have said a couple times on podcasts that I have my doubts about US production growing at $70 a barrel, but I think the idea that US production will grow at $50-60 a barrel is a fantasy. Could we flush to those levels? Absolutely, but I have a hard time seeing how we stay down there for any sustained period of time barring a serious recession. I also wanted to elaborate on the geopolitics side regarding Europe.

I talked about it a bit on Thursday, but it seems like there’s no brakes on that train as far as European countries spending and gearing up for conflict with Russia without US backing them up. Whether it’s stuff out of Germany, Poland, or England, several different things point to Europe potentially making a massive mistake in 2025. I don’t like what is happening in Ukraine, but they are a pawn on the geopolitical chessboard. If the US is out, and Europe decides to go all in with 2/7 off suit (which is what they have after hollowing out their military, manufacturing base, economy, and energy infrastructure), it seems like a recipe for chaos in Europe. I know several sharp people that have laid out why Europe needs a war, why gold has been flowing out of Europe and into the US, but that’s a rabbit hole for another time. European markets have been ripping, but the whole situation in Europe makes me nervous. I think it has the potential to turn into a slow motion train wreck on the geopolitical side, as well as in financial markets.

I didn’t even get into US oil production growth slowing, which is something G&R and others have gone into in detail. I just wanted to lay out all of the things that I have seen recently on oil that I thought were interesting. The last thing I will say is that there are a ton of moving pieces right now on the geopolitical stage and in financial markets. It has been a bit of an information overload, from tariffs changing on a weekly (or daily) basis, arguments on why the US needs weaker dollar and lower interest rates, a rapidly shifting geopolitical environment, to wild financial market swings. One thing is certain: we definitely live in interesting times.

Value Hive w/ Adam Rossi

Before I talk about Sable, I wanted to detour into a couple great podcasts I listened to this week. I listened to this one yesterday on the way to the gym, but if you’re interested in changes going on in the defense sector, this one’s for you. Rossi talks about his experience building and exiting a business, and what he’s looking for when he’s looking at defense stocks. He also talks about some of the investing lessons that he has learned along the way, including some interesting thoughts about taking risks. Even if you’re not specifically interested in defense companies, this one will have something for everyone.

The Founders Podcast: Jerry Jones

I always listen to the all the Founders podcasts, but this one was particularly fascinating. It sort of fits in with today’s theme on oil, but this one is worth a listen for the stories and risks that Jerry Jones took on the way to becoming the owner of the Dallas Cowboys. There are a lot of stories and lessons from his life, from the importance of hard work, to stories about the huge chances that Jones took along the way. This one won’t talk about what is going on in markets today, but it was easily one of the most entertaining podcasts I listened to this week.

A Quick Update On Sable Offshore