A perfect storm for the energy sector

Do you have a strategy for your investments? Have you thought about what your investment philosophy really is, what you de facto have as a fundamental basis for how you invest your financial capital? Thinking in terms of priorities rather than absolute decisions can help. Simply put, you have both capital ("money"), and a stream of income ("salary", "return") and expenses ("accommodation", "transport", "food & care", "entertainment"). You prioritize how much of the income you should spend today and how much should be invested. And somewhere you have a distant horizon where everything has to be consumed by you or others. Of what is invested, you prioritize between different asset classes, e.g. stocks or commodities, and various specific individual choices within the classes. Your task that you have assigned to yourself is to maximize your expected life experience, with a view to avoiding unacceptable outcomes on the downside.

How do you do it?

For example, if you only buy gold bars, you will have exactly these gold bars when you retire or when you want to consume the value of the bars. However, you do not know at all what the gold will have in relation to what you actually need in the future, ie food, accommodation, transport, care and entertainment. You know, however, that you cannot eat gold, nor using it for care or entertainment. So, if you are only going to have gold bars, you have a chance that gold in the future will play an important role as an anchor for the monetary system or that the gold's unique physical properties will eventually prove to be worth their weight in gold. Otherwise, you stand there hungry and frozen with a pile of yellow stones. It is such an "unacceptable downside" that must be avoided by investing in other alternatives.

It is not easy to invest, and it is not easier to invest on the basis of large overarching macro themes than to carry out micro-analysis of individual companies or entrepreneurs. Analysis of the type "everyone should live somewhere, so buy real estate companies" have no value if you do not know the price of the companies. The same, of course, applies to food, cars, online entertainment, etc. No, the task for an investor is to think out which relative prices give an increased probability of a well-executed “Lustiga Huset” staircase - that is, to jump back and forth between sufficiently good investments based on their currently relative value proposition. The question you want answered is whether it is better right now to have, for example, more gold (or oil, or real estate, etc.) and less equities or vice versa.

You do not always have to keep track of all relative prices at the same time to try to weight optimally between asset classes and individual shares, or other units of an asset class. For the most part, it is excellent to be weighted much like the world at large, ie just own some kind of average position - an index. Then you get the same return as all other investors, which is a little better than the economy as a whole, which in turn is clearly better than for the average person (because most do not have as much capital invested but balance their income and expenses in each individual time without opportunity for exposure to systematic creativity and creation via the stock market).

Sometimes, however, clear opportunities are created, large distortions in relative pricing between different companies, industries or asset classes. Of course, it is difficult to know for sure in advance how the future will develop. Investments are about probabilities. But with that said, a perfect storm in a positive sense seems to inflate in the energy and commodity segments of the economy relatively many other industries and classes. This is due to a combination of several different factors, not least inflation due to 1) pandemic-related logistics problems, 2) declining population growth and 3) money pressure. Rapidly rising prices make the economy less efficient due to difficult-to-understand relative price changes at the same time as real assets rise in price. Oil and other energy-related commodities are among the best indicators that are the actual winners of inflation. Energy, the ability to make things happen, has an indisputable value. Without energy, no activity. This means that the relative price of other goods and services falls relative to the price of energy until pricing balances the willingness to exchange for the most motivated marginal buyer of energy.

In recent years, environmental considerations have led to reduced investments in oil production. Of course, it is good in the long run to reduce the combustion of fossil fuels, but unfortunately it has gone a little too fast. Too late it has been realized that sun and wind are not as reliable as coal and oil. Sun and wind are not enough, especially at night, if you do not have sufficient energy storage solutions or controllable electricity and heat from nuclear power plants. The expansion of sun and wind is also quite slow, as you start from a low level and it costs a lot of energy to extract materials for the parks and to build them. And even when the energy parks are expanded, an enormous oversizing is required for the minimum production during dark and windless hours to be sufficient.

Unfortunately, other safe and controllable energy production is required, which in practice means oil, coal, natural gas and nuclear energy. Russia's war against Ukraine is largely based on Ukraine's enormous natural gas resources. If foreign companies such as Shell had been allowed to develop these deposits undisturbed, Russia's exports to Europe would probably fall significantly, especially if Europe and NATO do not like Putin's policies. In any case, the unit price of oil and gas would have fallen at the same time as a reduced Russian sales volume. It would be a disaster for the Russian economy, Putin's re-establishment of the Russian superpower and not least his ego.

Putin thus had to attack Ukraine. This in turn led to a slowed down flow of various forms of carbon-based energy sources and thus a lack of controllable energy. A panicked blow on the non-Russian gas and oil that was available thus pushed prices up to record levels. After that, it seems that Russian hydrocarbons were leaked via China and India, but the war and the price reaction have now focused on oil dependence once and for all. At the same time, there are no signs that investments in oil exploration will increase again, not as long as oil is classified as dirty - probably forever. This means that oil will be a constant scarce commodity, albeit in steadily declining volumes. In addition, the slightest disruption in Russia, the Middle East or US shale oil means that the price is rising. This means highly interesting investment opportunities for awake traders.

However, rising oil prices are expected to be accompanied by falling volumes for the oil companies themselves, so their profits are stagnating. Thanks to the fact that many investors are liquidating their ownership of companies linked to emissions and global warming, the oil companies are still relatively cheap, which means a high return for shareholders, even if the actual price development is moderate. Therefore, it is good to combine oil investments with uranium shares. It is the only other reasonable source of reliable and emission-free energy. Where the oil companies make up only a few percent of the market value of the stock exchange, the uranium companies are even an order of magnitude smaller. The stock market is worth tens of trillions of dollars, the oil sector a single trillion and the entire uranium sector is only counted in tens of trillions of dollars (billions). This means that regardless of whether you buy my view or not, the energy sector is undervalued relative to most other things on the stock exchange, as the basis for all economic production has become a scarce commodity and yet so far only valued at a few percent of all activity based on energy, then there is a value arbitrage between oil and uranium. The difference between oil and uranium, apart from the market capitalization that is counted in many tens of times difference, is that the oil is now while the uranium companies do not produce profits until in 5-7 years.