Top of Mind: Why Goldman Sachs is Predicting Higher Oil Prices

Wall Street Journal Article – https://www.wsj.com/economy/august-cpi-report-inflation-slowdown-85936a0a

Oilprice.com Article – https://oilprice.com/Energy/Oil-Prices/Goldman-Claims-Oil-Prices-Could-Hit-107-If-OPEC-Extends-Cuts-Next-Year.html

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Ben Fraser: Welcome back to another episode of the Invest Like a Billionaire podcast. I’m your host, Ben Fraser, joined by fellow host, Bob Fraser, and today we’re going to be giving you another Top of Mind episode. These are shorter episodes where we’re talking about different things. We’re seeing the economy, different headlines that we’re seeing and questions that are being asked from our listeners.

And so today we wanted to talk a little bit about what we’re seeing in the oil and gas market. And so if you’re looking, you know, last week and into this week, we’re starting to see Prices trend up on Brent and crude oil, actually touching 90 a barrel, which is definitely higher than it has been in the recent past.

And so there’s a few things going on, and we’ve been talking a lot about oil and gas over the past few months. It’s actually an asset class we’re very bullish on and have a lot of excitement around. And wanted to kind of just tease out some of the things that are going on in the supply and demand, uh, because it is an ever evolving topic.

So, Bob, we want to kind of break down a little bit of what’s, what’s going on recently. Why are we seeing this? It’s, you know, a substantial tick up in price here over the past few weeks. 

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Bob Fraser: So this is based on an article from Goldman Sachs, who we very much respect as a bank that does research. And they’re basically saying, well, prices could hit 107 a barrel, uh, if OPEC extends their cuts into next year.

So, their cuts are scheduled to go through December. Production cuts, and they’re doing that to, to, to, you know, to elevate prices. Um, so, uh, they, they believe that, you know, they could go up to 107 a barrel. Now they’re interestingly saying it, it really can’t go much above that or really maintain a price above 100 a barrel because OPEC doesn’t have interest in doing that.

And the reason they don’t have interest in oil over 100 a barrel is because they’ll see increased competition from the U. S. based producers. So, uh, so it’s, so we, we kind of agree with that. We think that oil prices are going to, you know, stay somewhere between 80 and a hundred dollars a barrel for a while.

And that’s as long as China continues in its kind of slow growth, uh, slash recessionary kind of recovery, non recovery in their, uh, their economy. They’re big. Wild card. So we’re not, we’re not seeing demand, oil demand kind of, uh, you know, increasing right now because of the slower economy. So we’re continuing to see a kind of plateau and peak, um, because of lack of investment, um, globally and, um, and because of these oil cuts.

So, um, it really is a very good, you know, buying opportunity right now to begin to continue buying oil assets. 

Ben Fraser: Yeah, it’s really interesting. It seems like OPEC theoretically has found this Goldilocks zone, right, where they can keep prices higher than, you know, where everyone’s kind of making more money.

They’re making good money at 80 and 90, you know, dollar barrel oil, but it’s just not high enough to where it’s, uh, you know, accelerating the investment into new production, you know, in the U. S. and other areas at a, at a big enough level that’s going to, you know, Now increase supply and then put some pressure on price to come back down.

So, um, it is kind of an interesting thing. We’ll see how that plays out. It also looks like Russia is claiming that they’re also going to make some production cuts, but who knows if, you know, that’s more of a Um, you know, good PR on, um, they actually can’t sell their oil or if it is true that they’re trying to make production cuts.

Bob Fraser: Right. So longer term, we still think oil is going to, is got a ton of upside to run, uh, once the economy of the world kind of hits in high growth mode because it’s been, um, you know, investment in fossil fuels has been just, uh, massively underinvested for the last seven years. So, um, it’s, there’s not enough supply.

Down the road. So right now there’s enough, but there won’t be. 

Ben Fraser: Yeah, we’re, we’re kind of at a funny spot, you know, from an investment standpoint where we like to see the higher prices because in the oil fields that we do own and the production that we are making, we like to sell into higher prices, but we’re also.

Really net buyers right now. We want to buy as much as we can. And so we don’t want it to go too high because you know, there’s, it might create more demand from an investment standpoint, capital deployment standpoint, and, uh, you know, limit the opportunity. So, you know, it’s, it’s interesting to see that this play out.

Here’s a tie in some of the other themes we’ve talked about over the past several months. What you’re saying is, you know, we, we’re kind of this, this weird conundrum where supply, you know, it has been decreasing. It’s been on this pretty steep decline curve, but you know, our demand is kind of, you know, gone in line with that.

And especially as we talked about China, maybe facing deflation, uh, a few weeks ago, they’re the real big wild card here, right? So if their economy turns around and they start having higher demand. As soon as that kind of demand trigger, you know, crosses that supply threshold, it’s going to be very interesting to see what happens because the supply of production is pretty inelastic, right?

It takes a long time to put on new production, to, you know, do all the, Um, you know, betting permitting and getting new wells drilled and, um, producing. And so it is a really interesting thing where even right now we’re seeing higher prices than normal, but it still feels like we’re in this still a bit of an early energy crisis going over the next couple of years.

We are going to have a severe supply crunch and, you know, we’ve talked a lot about long term themes of oil and demand for that. It’s still being, uh, uh, pretty, pretty strong even despite alternative energy sources. So another kind of angle I wanted to tease out with this because it’s interesting to kind of understand what’s going on there and how that plays into oil and gas investment themes, but it also plays into another theme that we’ve been following for a while.

We’ve all been saying, hey, inflation is likely going to be stickier. And now it seems like everyone’s saying that, but we’ve been saying that for at least a year now, and part of the reason is, uh, you know, CPIs can be hard to get down to 2 percent level, and a lot of what makes up is housing and energy.

And if you just listened to Jay Park’s episode last week, if you have listened to it, go listen to it right now. It’s an incredible episode. He’s the chief economist at RealPage. Uh, studying housing and all the supply demand, uh, capital markets of, of what’s going on there. Very, very fascinating. And he’s, he’s actually making a case that, uh, there’s a lagging, um, uh, timeframe for the reporting on housing numbers.

So housing, uh, you know, rent increases or decreases into CPI and that, that actually is going to be, uh, going downward. But meantime, we also have, uh, oil prices that are ticking up and that’s actually another You know, component of CPI and driving up inflation. Um, so there’s still this kind of, you know, a lot of different things going on.

And I don’t think there’s any high level of confidence yet that the Fed’s going to be dropping rates anytime soon. Um, but do you have any kind of thoughts on that and how this kind of plays into this longer term inflation? Right. And, 

Bob Fraser: uh, yeah, he’s, he’s right. So if you actually look at the components of the consumer price index, the largest single component is shelter and everything related to shelter housing.

And so we have actually seen rents drop. Yeah. Year over year. Right. Um, just, just, just recently. And so as that gets factored into CPI, we’re going to see CPI coming down. Consumer price index. So the inflation is actually going to be, inflation numbers, the headline numbers are going to be coming down in the short term.

That’s the largest component. And a non component of inflation is energy. Um, it’s really not a component, but it’s underlying almost everything, right? It, you know, everything goes up because, you know, the diesel fuel for transportation, the diesel fuel for agriculture, um, everything is underlying, but it’s actually not a factor of CPI, but it affects a lot of things.

And, uh, and so we’re, we see energy prices going up. Uh, you know, long term, and of course they’re up right now, 90 a barrel, so, so, uh, what we’re probably going to see is inflation being softer for the next 12 months, um, you know, really coming down quite a bit because of the housing numbers, um, as they get factored into the housing numbers, but, uh, we’re going to see, you know, I see those numbers again, not coming down as far as they could because of energy.

And again, um, as the housing numbers equalize, it’s kind of slowed down. We’re going to see the energy numbers continue to have an impact. So, so medium to, you know, short term, we’ll probably see CPI coming down. Um, medium term, we’ll see it, we’ll see it taking back up into, you know, more uncomfortably high areas, you know, again, probably four to 6 percent range where we see it, um, medium term and probably before that, well, we might see it down, you know, three and below.

Um, so that’s kind of the, uh, what the crystal ball was saying from my side. 

Ben Fraser: The ever evolving crystal ball, because there’s a lot of things going on, but. You know, it’s, you gotta, I love what you said a few weeks ago where we are trying to evaluate all this different data, right? One of the biggest things that you need to do is look at scale, right?

What’s the impact? How big of a factor is this, right? Because anything on its own can be pulled out as a headline and this is happening, right? But is, does this really affect the bigger picture, right? And does this actually move the needle? And so I think. And that’s really a lot of what we’re trying to do is understand, you know, what are the bigger factors and forces that are moving in the market and, um, impacting some of these things.

So hope you enjoyed this, this little, uh, short episode, uh, and if you are enjoying it, please do subscribe. So you get notifications. We’re putting these out every Monday along with our, uh, normal episodes on Thursday and, uh, definitely for review and sharing with somebody. If you’re enjoying this, we appreciate you helping get the word out.

It’s been awesome to see. Uh, the growth of our listeners and the feedback we’ve been getting. Thanks so much.