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This is a transcript of a recent video with Jim Rickards
I've got two predictions but I want to kind of broaden it a little bit. My recommendation is I have two stocks: Chevron, New York Stock Exchange ticker CBX, and ExxonMobil, New York Stock Exchange ticker XOM. And when you say, okay, I'm recommending energy companies, people go well, that must mean oil prices are going to go up a lot because you know it's good for energy stocks. And I just gave a recession deflation scenario so how do you kind of reconcile those two things? Just want to spend a couple of minutes on energy prices in general and why I like those two stocks whether oil prices go up or down and again I'll explain why.
The energy market is extremely difficult to analyze but one of the reasons for that is because there's a huge market manipulation political component to it. So it's a long list of factors we would look at. You know obviously we look at supply and demand broadly speaking, geopolitical factors including relations between us and Iran, us and Saudi Arabia, other key linkages between Saudi Arabia and China. You’ve got to look at interest rates, exchange rates, pumping logistics, transportation logistics, new oil discoveries, refinery capacity, new technology, and of course, you know, fracking revolution is old news at this point but that's an example of how technology really can revolutionize the industry. And these factors have to be put in the context of geopolitical unrest including the war in Ukraine, the war between Hamas and Israel, the chances of escalation in both of those wars to the point of the use of nuclear weapons, and the financial sanctions which have been wrapped around Russia and the rest of the world as a result of that. And I'm not a meteorologist but I always say “don't forget the weather.” The Russians have a name for weather, they call it General Winter. General Winter is one of their commanding officers and the Russians had to fight in winter and most armies don't. So that gives them an advantage.
Last year, Europe skated through what could have been an energy disaster because it was a fairly mild winter and they took some steps to increase their natural gas imports. And by the way, Europe is still buying enormous amounts of natural gas from Russia as much as any.
Russia's hard currency revenues from energy sales, oil and natural gas are at all-time highs. So don't believe what you're reading in the New York Times. They're not starving, they're not shut out of the markets. The boycotts don't work, the sanctions don't work and they're still selling plenty of energy to Europe. And by the way, the pipelines go through Ukraine. It's like, you know, the Russians are paying Ukrainians usage fees to run the pipelines and Europeans are paying the Russians for the energy in the middle of a war between Russia and Ukraine. So I guess we're financing both sides but nothing particularly unusual about that.
My bigger point is, every factor I just mentioned, I'm not going to repeat them all but you know interest rates, exchange rates, wars, geopolitical etc., they can apply to any analysis. They could apply to any stock or any commodity. So what is it that is really special about the energy market? I mentioned at the beginning, it's the big three. It's the United States, Russia, and Saudi Arabia. Those three countries produce a little over 30% of the total oil supply in the world. They dictate the prices, there's no question about it. Not just Saudi Arabia by the way, the US and Russia are a very big part of that. So it's market manipulation by sovereign states that sets oil apart from almost any other market. Oil is the blood in your system. You simply can't do it without it.
If you have a copper shortage, okay, the price goes up, construction slows down, mining output maybe increases, you do something about it but you muddle through. It's not the end of the world. With energy, it's different. Shortages develop, the lights go out, heating systems fail, air conditioning goes off, the power grid can collapse, transformers explode, and military capacity can be highly degraded. People die. That's what happens when there's an energy shortage. So it's really up to the big three to make sure that that doesn't happen. My point being energy is too important to be left to markets. Of course, markets play a role but the geopolitics of those three countries decides what's in their best interest.
Now, right now we have a very good example of that which is Saudi Arabia has reduced output and encouraged others to do likewise to prop up the price. Why are they doing that? Well, they've got goals. They want oil to be around $75 a barrel. They might love it to be higher but they need it to be $75 a barrel because that's how much revenue they need based on output just to meet their budget. I mean they've got a lot of mouths, as the saying goes. The fundamental case of oil prices is weak. So I'll come back to the geopolitics but the fundamental case, you know with WTI futures on NYMEX hit $93.68 per barrel on September 27th, just a few months ago. There it dropped to $82.31 on October 5th, 12% drop in one week. A little bit of a rebound on the massacre of Jews on October 7th but that once it appeared that that was sure it was a war between Israel and Hamas but the fear of escalation dialed down a little bit so the decline of oil prices continued.
And we were at $69.50 a barrel today. That's a peak to trough drop of 26% from the late September high. That's the trend and it's consistent with everything else I just said which is that inflation is coming down, not for good reason. Inflation is coming down because we're heading into recession. When you get into recession, you should expect commodity prices to drop and oil prices to drop with them. Recession signs are real and they're growing worse. Credit contraction, rising bad debt, increasing jobless claims, collapsing commercial real estate markets, contracting world trade, inverted yield curves, a number of other technical indicators. In fact, as I mentioned, the recession may already be here.
Interest rates typically peak after a recession begins. A lot of people don't get that but this goes, you know, take your time series back as far as you like.
When you get into recession, don't interest rates come down? In the end, they do but at the beginning, they go up because revenues are drying up, margins are contracting, companies need working capital. So they actually borrow, use up the lines of credit, etc. That tends to increase interest rates when the recession has already begun. But then within a month or two of the recession as things get worse, yes then interest rates come down because bad debts stack up, banks tighten the lending standards, etc.
So the fact that interest rates have already peaked kind of November 1st was the peak in the yield of maturity on the 10-year treasury note which is a good proxy. Everyone looks at LIBOR, you know, or overnight rates, repo rates, SARE which you know, etc. That's important for leveraged investors, for hedge funds, even for banks if you're financing things in an overnight market. But if you're getting a mortgage, if you're doing construction, if you're doing a long-term fixed asset investment, the 10-year note is a much better proxy.
Those are five to 10-year horizons and that's how you have to think about financing them in the bond market. So that peaked on around November 1st, it's been coming down which tells me that the recession has already started, consistent with the consumer hitting the brakes in October.
So if that were all we had, you just say hey oil prices are coming down, could be down to $45 a barrel. That would not be a big surprise under those conditions. But this is where the market manipulation comes into play. I mentioned Saudi Arabia wants higher oil prices, the US wants higher oil prices for completely different reasons. We have the green news scam running 24/7. Biden depleted the Strategic Petroleum Reserve. So now but now they're going to fill it up at higher prices, you know, it's typical Biden policy. But the point is the Greenies, you know, Jennifer Granholm, Secretary of Energy, Biden, and the rest, they want higher energy prices.
Sorry, they want higher oil and gas prices because they're trying to cram electric vehicles down everyone's throat. They're non-economic by the way. The peak in electric vehicles was 1910. They were pretty popular between 1900 and 1910. They were invented in 1837. The only ones using them in the 1950s were the East German Postal Service. They had a fleet of electronic vehicles. There's a reason why the electronic vehicle was obsolete in 1910. Batteries. Guess what hasn't changed?
Yeah, batteries are a little more efficient but you know, you got to pull over every 300 miles, forget it. I mean and people forget that in the winter, you know, I have a six-cylinder 24 valve 350 horsepower engine but when I want heat in my car, it's free because the engine's hot so they just blow the hot air into the cabin and I stay warm. If you want heat in an electric vehicle, in a Tesla, guess where it comes from? Comes from the battery. So you know, you're using your battery up faster, you can't even go as far.
They’ve got all kinds of problems but like I say, it's an obsolete technology except for golf carts. So I'll grant that electric golf cart is a good way to do it. But the government's pushing them as a matter of policy, ideology really. And so they need higher oil prices to make the really lousy alternative look better by comparison. So the US has got an ax to grind. Of course, Russia wants higher oil prices because they're fighting a war.
So you, the big three, all have their own reasons for pushing prices higher. What could make oil prices a lot higher? Well, you know, a Houthi missile that hits an oil tanker in the Gulf of Aden or the Red Sea. The war in Israel, Gaza escalates to the point where you have to take out the Iranian Navy which Ronald Reagan did by the way, that's not a stretch. He actually did sink a lot of Iranian Navy vessels. Iran retaliating by closing the Straits of Hormuz. Hezbollah escalation, there is a closer Iranian proxy than Hamas.
Hamas is on the payroll but Hezbollah is the real Shiite end of the Shiite Crescent as they call it. And they've been ratcheting up their activities and the Houthis, you know, of course, Biden took them off the terrorist watch list, nice going Joe. They're the ones firing drones at Israel and trying to hit tankers and commercial shipping in the Red Sea. So that escalation potential is there.
So just to kind of summarize, the lower price factors kind of come down to one thing which is recession. I could give you 20 reasons why we're in a recession but that says it all. The higher price factors, Russia, US, and Saudi Arabia all have their own reasons for higher prices. We could be in for a really bitter cold winter. I think the weather might work in favor of higher energy prices this year. Financial sanctions and the green news scam.
So then getting back to Chevron and ExxonMobil, like well okay Jim, which is it? Higher oil prices or lower oil prices? I just painted two scenarios where the likely outcome is much lower oil prices but you cannot discard the potential for much higher oil prices based on one or more of those factors coming into play. So don't you have to pick one or the other to recommend the energy stocks Chevron and ExxonMobil?
The answer is no because they do well in both states of the world. They're big companies, they've got a lot of planning, they've got a lot of capital expenditures, they've got a lot of levers they can pull. The easy one is higher energy prices, yeah that will absolutely benefit. By the way, just before I finish, I should disclose I do own a small position in Chevron and so just put that on the table. I will not sell it without notifying all our readers.
I have no intention of selling at the moment but if that changes and I decide to sell it, I won't sell it before we notify our readers so everyone will have a heads up on that if/when the time comes. But that said, yeah higher oil prices clearly benefit Chevron and ExxonMobil but lower oil prices can benefit them as well because you can't look at any one factor in isolation.
A world of disinflation, a world of recession where energy prices are coming down, guess what else is coming down? Their costs. So interest rates that they pay, labor costs, transportation costs, etc. So the margins can actually expand and that's how you judge a stock basically, their margins and profitability.
In addition to that, Chevron and ExxonMobil have both announced major acquisitions in the past six months that they haven't closed yet. They're in the process of closing but there are huge economies of scale that are going to come out of that that have not been fully factored into the stock price. So in a world of recession and lower oil prices, you're going to have lower costs, economies of scale.
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