Note from Adam Rozencwajg dated 6-4-2025:
Oil prices moved without much conviction in the first quarter, caught between tightening fundamentals and indifferent investor sentiment. West Texas Intermediate slipped modestly, while Brent managed a gain just north of 1%—hardly the stuff of headlines. Energy equities, like the commodity itself, were mixed. The XLE ETF—dominated by large-cap integrated oil companies and often pressed into service as a funding vehicle in the modern-day carry trade—rose nearly 10%. The move was driven less by enthusiasm than by necessity: as technology stocks faltered, hedge funds and systematic traders were forced to unwind their short positions in XLE, which had become a convenient offset to their tech-heavy longs.
Beyond these household names, however, energy equities fared less well. The XOP ETF, which tracks the S&P Exploration and Production Index, was flat for the quarter. The Philadelphia Oil Service Index (OSX) fared worse, falling nearly 8%. Sentiment across the sector continues to be pessimistic. The energy sector’s weight in the S&P 500 is now back near its all-time low of 3%—a level last seen in the dark days of early 2020.
From a historical perspective, oil has seldom been cheaper relative to gold—a fact we explore more fully in the “Oil” section of this letter. And sentiment may be missing something far more consequential: a looming, underappreciated decline in non-OPEC supply.
We believe the stage is being set for a structural repeat of the 2003–2008 oil bull market. Then, as now, the market was gripped by bearish consensus. And then, as now, a quiet but critical shift was taking place beneath the surface. In the early 2000s, production from the North Sea and Mexico’s Cantarell field began to decline sharply—developments that caught most analysts off-guard. OPEC, in turn, seized both market share and pricing power. Oil prices rose nearly sixfold in five years.
Today, the U.S. shale patch—source of more than 80% of global non-OPEC supply growth over the last 15 years—is beginning to plateau, with signs of a broader rollover. And just as with the North Sea and Cantarell, the shift is going largely unnoticed. Outside the U.S., non-OPEC production has offered little to offset the trend.
Investor sentiment, meanwhile, borders on apathy—an apathy we believe has created a rare opportunity. For those willing to look beyond the momentary malaise, the setup in energy equities today may prove as compelling as it did two decades ago.
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I "feel" that a significant "Paradigm Shift" is just a few months away. Over the next few months, with rising oil demand that happens EACH SUMMER, it will become clear to the Wall Street Gang that the global oil market is much tighter than they think. If WTI just rebounds to $70/bbl, our Sweet 16 is grossly undervalued. We already know that U.S. natural gas and to a lesser extent NGL prices are going much higher in 2H 2025. If oil prices rebound, there is significant upside in all of our Sweet 16 and Small-Cap Growth Portfolios. Based on the fundamentals, the "Right Price" for WTI oil is $78.37/bbl.
Dan Steffens
Energy Prospectus Group |
