Greenwashing & Natural Gas
“The financial services industry is duping the American public with pro-environment, sustainable investing practices” - Tariq Fancy [former BlackRock CIO of sustainable investing]
Editor’s Note: we’re back, after a work-necessitated break. Thanks for waiting.
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Last week, Blackrock’s former head of “Sustainable Investing” - Tariq Fancy - eviscerated the “E” & the “S” in ESG.
***On National TV***
His arguments are well known to the Oil / Gas / Nuclear worlds, as well as to sober investors.
Still, it was surprising to see Tarik as the messenger.
It’s not quite the same as the Pope becoming a Protestant…
…but perhaps a Cardinal - certainly an Archbishop - screaming heresy to his [former] Church.
Given enough time, reality tends to rip away the veils of ignorance.
Tariq being a case in point.
Yesterday, another - similar - veil appears to be falling off a very large face.
The FT reported that the EU is considering labelling gas as “sustainable”.
There’s no doubt that if your goal is less carbon - and you don’t want to use nuclear - then increasing natural gas usage is the only way you get there.
There was a doubt as to if the EU / many Western governments could do math.
Their stated sustainable finance plans didn’t add up to a feasible solution.
With gas, they do.
And we think that at least a couple European IOCs (Total et al.) were the beneficiaries of their regulators tipping their hands.
And they planned accordingly.
It’s not like the European IOCs could (or even try to) hide the cards (like Mozambique) that they played over the past few years.
The deals were too big.
However, the certainty of Total’s language - like calling LNG “an Energy of tomorrow” - specifically in the context of yesterday’s headline out of Brussels, means that - to us - they knew this language was coming.
And front-ran the trade -
11yrs ago, BAML ran a note (below) on “commodity super-cycles”:
The trade was a bloodbath.
History was rightly cruel to this thesis.
[To be fair, most of the sell-side held this thesis - we bring up BAML bc they gave the best arguments for, albeit incorrect in hindsight]
It’s worth examining why the thesis fell apart.
We’ll start with the idea of persistent, multi-year “insufficient production capacity”.
That played out - for oil & gas - about as accurately as a flat-earther’s description of the universe.
For some commodities (like Helium), prices did appreciate dramatically.
Today, there’s still a shortage of cheap Helium.
But prices of just a few commodities dramatically rising *is not* inflation.
Those *are* cases of “insufficient production capacity”.
Worse still, the inflation argument (from the above report) completely fell apart.
But the ghost of inflation still haunts equity investors….
The late 70's saw the peak of the Misery Index coincide with high oil prices.
And recent fears of inflation (which may come to pass) are causing investors to search for trades that historically performed well in high inflation environments.
Those investors return from their studies with the trade “long-oil”.
Well, oil spiked in the late ‘70s on account of supplies being disrupted by the Iranian Revolution & the start Iran-Iraq War.
But investors don’t do that much homework.
They like themes…
“…humongous ETF inflows into energy past 4 weeks as inflation theme dominates…” - BAML Flow Show, March 18th 2021
Over the same time-period, WTI is down ~3% & XOP is flat.
For an investor, the theme to ride is not ~“inflation causes commodity prices to rise”…
..it’s “insufficient production capacity” causes commodity pries to rise.
Which has been happening to a number of commodities…
Chinese environmental regulations have caused Steel & Aluminum prices to go interstellar.
On cue, “insufficient production capacity” strikes again.
We think the blind commodity inflation thesis is baseless.
Don’t buy it.
But - if a commodity has production capacity issues - there’s your trade -
Cheapest shale refinancing conditions in last 7yrs
More on inflation & data from Macro Hive
An interesting Guyana Basins Summit note
Gas bills, post-TX-blackouts
Btw, if you want an inflation hedge - just buy BeeTeeCee; it quite literally can’t be inflated, by design -
That’s it for this week - outside of investing & commodities, we’ve been listening to the neuroscientist Andrew Huberman’s podcast: Huberman Lab - if you’re looking for a non-fiction / non-work / science related podcast, then we strongly recommend it (also strongly recommend for athletes) - catch y’all next Tuesday -