Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. William A. Ward
Good morning,
It’s been a few weeks since my last Monday morning musing, I trust everyone had a wonderful Thanksgiving weekend here in Canada and you are all enjoying the beauty that the fall season offers us. It’s a perfect time of year to start getting organized, not only preparation for the winter months ahead, but for what the new year will bring and how we design to make the best use of our time.
We find this time of year a perfect time to meet with our clients, to create and recreate our roadmaps for the years ahead. As most of you have heard me mention, the roadmap is an evolving and ever-changing vision, but, as it’s been said, “if we don’t know where we are going, any road will take you there”.
The challenge for us all this year, as we attempt to look forward, is that we continue to face a lot of uncertainty….and, as we continue to transition back to the “new normal”, we are finding challenges in defining our goals and our vision, given that it’s difficult to visualize what the road ahead may look like.
As Morgan Housel suggests in his wonderful book The Psychology of Money, “planning is important, but the most important part of every plan is to plan on the plan not going according to plan.” Housel suggests that just because money, our personal finance and even our business decisions are typically thought of as math-based, where data and formulas tell us exactly what to do. In reality, in the real world we make our decisions around the dinner table or Boardroom, where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are all scrambled together.
At Henderson Wealth, we understand that planning and doing well with money isn’t necessarily about what you know, it’s about how you behave. Working closely with our clients and their families, to understand relationships with money, and defining goals and your vision is the best preparation one can undertake, and surrounding yourself with the proper advise and advisors, around your family room and your Boardroom table, will ensure that we are always planning for and ready to prosper through both the certainty and uncertainty ahead.
The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind. T.T. Munger
And now, to the markets
Global equity markets continue to digest a number of issues that have put a bit of a break on the markets’ upward momentum, at least for now. The supply chain bottlenecks that are plaguing multiple industries are top of mind these days as they are exacerbating inflationary pressures that were already creating unease amongst investors. The third quarter earnings season, which is now underway, may provide some clues as to how companies are navigating this environment. Below, we discuss the energy industry, and oil in particular, which is experiencing a resurgence driven by its own supply issues. Crude oil prices have more than doubled over the past year, rising from below $40 per barrel to more than $80. It’s a far cry from the absurdly low prices reached in the spring of last year.
Not surprisingly, there has been a recovery in demand as the world’s economies have been reopening to varying degrees and levels of mobility and activity are returning closer to normal. Meanwhile, some countries in the northern hemisphere are expected to switch from natural gas to oil to fuel their power needs as they enter the winter months. That’s largely because natural gas prices in some jurisdictions are even higher than oil on a per barrel equivalent basis. That could add another tailwind to oil demand.
A stronger demand backdrop is partly responsible for some of the oil price gains. But, the bigger driver has been supply.
There has been notable under-investment over the past decade. One could argue that oil is simply following a typical path of a commodity cycle: high prices encourage growth in exploration, development, and production. This eventually leads to oversupply, weaker prices, and cutbacks to capital expenditures. Years later, the underinvestment leads to a lack of supply that eventually drives prices higher yet again, and so on. This classic cycle may indeed be playing itself out yet again. There are some attributes that make every cycle unique. Most noteworthy this time around has been the focus on climate and sustainability in the public and private sectors that has made access to capital harder to come by across the fossil fuel industry. It is hard to imagine this changing much going forward given political pressure and the long-term nature of the commitments that entities have been making. This hurdle, along with demands from various stakeholders, has forced many North American oil producers to focus on efficient capital allocation and the prioritization of shareholder friendly initiatives over recent years, as opposed to their previous strategy of maximizing oil production. And while the U.S. industry was regarded over the past decade as being the world’s swing producer – able to turn its oil taps on and off relatively easily – there are reasons to believe it may be more disciplined going forward. There has been a similar shift among the thirteen members of the OPEC cartel, including Saudi Arabia. The cartel has been cooperating with Russia, and appears to be prioritizing oil price stability and strength and only marginal increases in supply. This approach has helped many cartel members improve their fiscal situations versus their prior strategy of simply maximizing global market share at any price. It is hard to predict whether this level of restraint will persist for the foreseeable future as we have witnessed many unexpected twists and turns in the past with respect to OPEC and Russia, who collectively control more than half of the world’s oil production. And so, this is likely to remain a source of uncertainty that investors will have to account for in the management of portfolios.
The prevailing oil prices will inevitably lure more supply into the market as is typical in an upcycle. But, the rate of supply growth may fall short of prior episodes given some of the constraints mentioned above. That suggests the supply and demand dynamics have the potential to remain supportive of more elevated prices than what we’ve been accustomed to over the past decade. And we believe the global economy should have the capacity to handle higher oil prices, up to a certain extent, given the elevated savings of consumers and further economic reopening that still lies ahead.
Naturally, the oil sector should benefit from a more robust oil price backdrop. Some of this is likely already reflected given how well the energy sector has performed year to date. Despite this, the sector is not very widely owned by global investors because of the weak prices and meager investment returns from the past decade. Moreover, some investors have incorporated an ESG framework– environmental, social, and governance – into their investment decision making process. This has led some to minimize, if not entirely eliminate, their allocations to the fossil fuel industry. We suspect some investors will return to the sector as they try to capitalize on the improving environment, and this could help support existing stock prices. But, other investors may remain steadfast in their approach to sustainability and resist the temptation to revisit the sector. In other words, there should be stronger demand for energy stocks relative to the past few years, but perhaps not to the extent we have seen in past cycles. The evolution to a more sustainable future that involves more sources of renewable energy is very much underway. But, it will take years to unfold. In the meantime, the world’s economy still depends on oil, and the lack of supply combined with recovering demand suggests an upcycle may already be underway. The oil industry should continue to see some better days ahead even if the longer-term challenges posed by the global energy transition remain.
As we head into the week, start to think about the year in front of you and all of the opportunities ahead. As we prepare and organize, together we’ll continue to define your roadmap and uncover the opportunities amid uncertainty.
What we really want to do is what we are really meant to do. When we do what we are meant to do, money comes to us, doors open for us, we feel useful, and the work we do feels like play to us. Julia Camero
Be well & enjoy the moments
Derek