The Administration’s planned release of 1 million barrels of oil a day from the Strategic Petroleum Reserve (SPR) is borne of their frustration with high prices. Average crude prices have been higher under Biden than Trump, even after adjusting for the collapse during Covid (not Trump’s fault) and the jump following Russia’s invasion (not Biden’s fault).

For energy investors like us, Biden has been a huge improvement. Trump knew he wanted lots of production to keep prices low and promote American Energy Independence. Executives were emboldened by a government they perceived as supportive. The results were good for consumers but ruinous for investors.

Although the correlation between the price of crude and pipeline stocks isn’t as strong as many think, rising prices that reflect strong underlying demand have boosted returns. For the quarter just ended, the pipeline sector returned +24.6% versus –4.5% for the S&P500.

New Jersey still mandates attendants at gas stations to fill your car. It’s a trivial yet tiresome rule – people should have a choice to pump their own gas, since it’s quicker. But recently, watching the attendant as the register ticked up past $80, I nearly jumped out and gave him a high five. Clients of SL Advisors are benefiting from White House energy policies.

We hold a minority view. Presidents have less control over oil prices than voters think, although Biden could claim some credit for the energy sector’s resurgence if he wanted to.

The White House thinks US energy companies are being abstruse in failing to respond to higher prices by increasing production. They must have advisers that understand why the sector is apparently denying itself even greater profitability, but their public comments and policies don’t reflect this.

Crude oil is in backwardation, meaning that the futures strip is downward sloping. Spot oil prices get the attention because they drive what voters pay at the pump. Production decisions are based on what produced oil and gas can be sold for over the next few years. As with almost any business, capital has to be invested up front with the expectation of a future return. If the curve was upwards sloping (contango), that would allow drillers to sell forward production at prices higher than today’s, creating the additional supply the Administration wants. It’s been in backwardation for the past year, and Russia’s invasion exacerbated this – meaning the effect on prices was more pronounced on the front month futures that impact gasoline prices than it was on the rest of the strip which drives investment decisions.

Moreover, oil companies can’t suddenly turn on a spigot. The list of reasons why current output hasn’t responded to prices as much as it might have five years ago includes (1) financial discipline, (2) White House long term anti-fossil fuel policies, (3) ESG opposition, (4) an increasingly capricious regulatory and judicial process for proposed and completed infrastructure projects, and (5) service provider inflation.

If you assume an oil well could be brought online in a year and produce equal volumes over the next four years, forward production could be hedged at $80, versus the June futures price of $101. Although futures prices are poor predictors, an E&P company that produces without hedging is just speculating on future oil prices. Investors can do that themselves with crude futures, so there’s little value added for the E&P company to do so themselves.

The SPR release of 1 Million Barrels per Day (MMB/D) over six months is an understandable political reaction, but isn’t likely to alter prices much, because it’s temporary. At about 1% of global demand, it will reduce our SPR to 345 million barrels, 48% of capacity and the lowest since 1983. Reducing crude in storage will increase our vulnerability to supply shocks from a hurricane for example. And depending on the compatibility between the grades of crude released and domestic refining infrastructure, these extra barrels may wind up being exported.

Goldman Sachs thinks use of the SPR in this way exposes the market to greater turmoil in the event of a further supply disruption from Russia.

For energy investors, it’s probably net positive. The economics of investing in new production are modestly worse than before the announced SPR release. But it doesn’t represent new supply, and the brief drop in prices delays the demand destruction that many analysts believe is the only way to balance the market. CEOs understand that the White House’s desire to increase supply is ephemeral and related to the mid-terms. The Administration will regain its former hostility to traditional energy just as soon as they can get gasoline prices off the news headlines.

Concrete steps to streamline the regulatory process and eliminate much of the uncertainty around infrastructure projects could induce some companies to invest more in future production. This is the area to watch for signs that pragmatism is informing the government’s energy policies.

We have three funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund

Please see important Legal Disclosures.

Important Disclosures

The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy,  completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments.  Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)

This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r

Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.

All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

Past performance of the American Energy Independence Index is not indicative of future returns.