The stock market’s $150bn trade in energy-to-waste

What explains the 2023 year-to-date dash for trash? It’s a question we’ve kicked around already on these pixels and the simplest answer — risk-on positioning for the pivot as inflation cools and China reopens — remains the most plausible.

Here’s a footnote:

The above chart, from Bank of America, shows record cash returns from European and US oil companies in 2022. European cashbacks were nearly double the 2014 level, when Brent crude last averaged $100 a barrel.

This is being funded at the expense of capex. Having been seen to panic in the early pandemic with dividend cuts, global oil companies have been leaning aggressively in the other direction:

A decade ago, balance sheets were destroyed as oilco dividend policies set in boom times were held for too long, in spite of Brent sliding from over $100 to under $30. Lessons have been learned, maybe. This time around, 40 per cent of the European returns have been via one-off buybacks (versus about 5 per cent in 2014):

So, for example, Shell’s up more than 130 per cent since the end of January 2022 and the company has bought back nearly 10 per cent of its shares:

BP’s similar, having risen 146 per cent and bought back approximately 8 per cent of its shares:

Investors approve. The most recent BoA global fund manager survey shows investor appetite for buybacks at a five-year high:

At risk of inviting a tedious argument about whether and/or when share buybacks can add value, it seems reasonable to imagine that some trash buyers have also been the sellers of oil stocks at their artificially jacked valuations. Selling last year’s consensus-long sector has been a natural pivot trade.

So, to some unknown and probably immeasurable degree, a $150bn-plus wealth transfer from fuel cost inflation has probably been recycled into 2023’s dreck dash.

Cash returns might be helping stuff like Tesla to double in the year to date, but is there any lasting consequence to all this capital discipline?

The companies say no. Goldman Sachs says maybe, with its commodities team noting signs of stress in refined product markets such as physical jet fuel, where shortages last month meant the price per barrel spiked from $100 to nearly $250.

Consumer oil prices have fallen from last year’s peak by about $60 per barrel in tandem with Brent, as well as on a weakening of record-high refining margins and a softer dollar. But as shown by the tight market for jet fuel, relief will be short-lived as “underinvestment, shale constraints and Opec discipline ensure supply does not meet demand”, Goldman says.

Tight refining capacity will likely mean gasoline shortages this summer, warns Goldman, which adds “relief is temporary, underinvestment is permanent”:

But then, who’ll need petrol when we can have perpetual meme-stocks.

Further reading:
FT.com/Energy-Source