Chief Investment Strategist, The Freeport Society
Senior Managing Editor’s Note: In a deepening of this Age of Chaos… unless you’re living under a rock – unlikely if you’re reading this – you know by now that a jury found former president Donald Trump guilty on 34 counts of sending hush money and using political funds to do it. At this point, no one knows the practical outcomes of this verdict… other than that we expect a lot more chaos to follow. As such, we will refrain from commenting on this still developing situation. Today, as always, we’ll stay focused on where investment opportunities lie and how to protect and grow your wealth. – Teresa B.
I’ve always imagined OPEC+ (the cartel of crude oil-producing countries dominated by Saudi Arabia and Russia) meetings looking something like the SPECTRE villains from the James Bond movies. A group of eccentric characters sitting around a boardroom table, stroking their Persian cats, and laughing maniacally as they corner the world’s energy supplies.
I’m sure the reality is far less exciting.
As my Freeport Society friend John Pangere noted on Wednesday, the group meets this Sunday.
Everyone expects the group to keep its 2.2 million barrels per day production cuts in place, curtailing supply in order to keep crude oil prices high, particularly now that we’re entering the busy summer driving season.
However, with Americans traveling at record levels, it would take a severe economic slowdown to make a meaningful dent in demand. And given that GDP is still growing at a healthy clip and the job market is still exceptionally healthy, we’re unlikely to see such a slowdown any time soon.
Tight supply with rising demand is a recipe for higher prices. So, plan on paying more at the pump this summer… and plan on high energy costs cycling through into higher consumer price inflation. Thanks, OPEC Secretary General Haitham al-Ghais! Ahem…
But…
There are two other possible scenarios in the cards here.
Seeing signs of a slowdown in China and perhaps fearing that the U.S. debt house of cards might finally collapse, OPEC+ could decide to boost production… bringing a couple million barrels of new supply online.
Is that likely?
No.
Is it possible?
Absolutely.
So, what would come of it?
Good, Bad… and Ugly
Well, Wall Street should like it.
Even though the real impact on inflation wouldn’t be felt for months, the perception that rising supplies and falling energy prices would be enough for traders to start pricing in a more rapid decline in inflation… and it might even give the Federal Reserve the cover it needs to start cutting rates as early as September.
Or…
Looking for a win, Russia convinces OPEC+ to restrict output further, cutting supply to an already tight market?
Ah! Here’s where it gets ugly.
Energy prices would go sharply higher, and the risk of imminent stagflation (high inflation paired with slow-growth stagnation) would soar. We’d be looking at a bona fide 1970s-style malaise at that point.
Again, is this likely?
Maybe not, but it’s within the realm of possibility.
The most important question, of course, is how do we position our portfolios for whatever comes next?
To start, I’d recommend investing in traditional energy. We currently have five energy and energy infrastructure stocks in our Freeport Investor model portfolio (subscribers can log in here), and I expect to see very solid returns in all of them.
But, for a one-stop shop, you might just buy the Energy Select Sector SPDR ETF (XLE) and go for blanket exposure to the sector.
And because inflation and stagflation are very real risks, you want to have some traditional inflation and currency hedges in your portfolio. My paid-up readers are long both gold and Bitcoin (BTC/USD), among other hedges.
Finally, as John pointed out Wednesday, the biggest winner of all from the OPEC+ belligerence (regardless of which scenario we see unfold on Sunday) may be nuclear energy.
Let’s ADVANCE
The Biden administration has committed itself to reducing carbon emissions. But the reality is that America simply cannot replace traditional oil and gas with solar or wind energy. Both have their place in the national grid, but it’s unrealistic to expect them to replace the reliable baseload power that oil and gas provide.
Nuclear, however, can really move the needle.
Nuclear power is “always on,” unlike solar or wind energy, and it produces zero carbon emissions.
Yes, there is nuclear waste to contend with… but disposal methods have improved over the decades, and nuclear energy has proven to be safe and reliable.
You can always count on our government to do the right thing… after every other alternative has been exhausted.
And it seems our government may have finally stumbled on to the right solution via the ADVANCE Act (Accelerating Deployment of Versatile, Advanced Nuclear for Clean Energy), which the House of Representatives passed earlier in May.
Once the Senate passes it and the president signs it, the act should incentivize massive new investments in nuclear energy.
Forget lithium.
The no-brainer commodity trade of the next decade might be uranium.
To life, liberty, and the pursuit of wealth.