TIP429: What is happening with Oil? w/ Josh Young

Episode Summary

Executive Summary: Josh Young presents a strongly bullish case for oil, arguing that years of underinvestment, shale exhaustion, labor/equipment shortages, policy constraints, and geopolitical disruptions are tightening supply just as demand keeps rising from global development and backup-power needs. He favors oil producers—especially small/mid-caps—over futures ETFs, and sees a potentially long, powerful oil bull market.

Main Topics: Why oil is “hated” and misunderstood (Priority: 5/5): Young argues anti-oil sentiment is driven by simplified EV narratives and misconceptions that ignore oil’s economic role outside transportation. Supply underinvestment and the two-cycle oil shortage (Priority: 5/5): He explains a long-cycle decline in conventional investment plus a shale boom-bust, both of which have left supply lagging demand. Debunking fracking and methane myths (Priority: 4/5): Young says widely circulated fracking criticisms often misrepresent groundwater pollution and methane leakage, and that regulated U.S./Canadian production is relatively cleaner. Demand growth from emerging markets and energy poverty (Priority: 5/5): The core demand driver is poorer populations in India, China, and similar economies increasing oil use as incomes rise. Rig, labor, and capital constraints limit new supply (Priority: 5/5): Even with higher prices, producers face shortages of rigs, workers, equipment, and drilling inventory, slowing the response of supply. Geopolitics, Russia-Ukraine, and Europe’s energy crisis (Priority: 4/5): Young sees Europe’s gas decline and Russian supply uncertainty as supportive of oil demand, especially for diesel and backup power generation. Investment case: producers over futures, focus on small caps (Priority: 5/5): He prefers undervalued oil and gas equities—particularly small and mid-cap producers—with strong free cash flow and overlooked assets.

Key Arguments: Oil has been underinvested in for more than a decade, so supply cannot quickly rebound to meet demand. The shale boom was a short-cycle detour inside a longer bear market; its bust exposed how much capital was lost on uneconomic drilling. Fracking criticism is often based on misleading examples; modern wells are controlled, regulated, and designed to capture methane. Demand growth is mainly structural: billions of people moving from poverty to modest prosperity increases transportation and power fuel use. High prices alone will not instantly create new supply because long-lead projects take years and the service sector lacks capacity. Oil producers are still cheap because institutions remain underweight the sector despite rising cash flows. Small-cap producers can outperform because they are ignored by analysts, miscovered, or misunderstood, creating valuation gaps. Europe’s natural gas decline and Russia’s supply risk are increasing demand for oil-based backup power and diesel generation.

Data Points: Bison Interests return in 2021: 350% - Referenced in the episode intro as evidence of Josh Young’s oil thesis success. S&P 500 return in 2021: 29% - Used as a benchmark against Bison Interests’ performance. U.S. oil production peak under Trump: ~12.7 million barrels/day - Cited in a discussion of U.S. production policy and output levels. U.S. oil production level under Biden: ~10 million barrels/day - Compared with earlier peak output to discuss policy and investment effects. OPEC+ quota increase: 400,000 barrels/day per month - Young describes the monthly quota ramp and persistent underproduction versus targets. OPEC+ underproduction vs quota: ~2% less than overall quota - Used to argue that spare capacity is overstated and supply is tighter than reported. Journey Energy production: ~10,000 barrels/day of oil and gas - Cited as an example of a small-cap producer Young likes. SandRidge Energy net cash: ~$6/share - Used to illustrate balance-sheet strength and undervaluation. SandRidge stock move: $0.70 to ~$15 - Mentioned to show the scale of re-rating possible in unloved oil equities. Capital budget increase: 20% to 25% - Producers are raising capex without raising production guidance, signaling inflation and catch-up spending. Oil price reference: ~$96 WTI - The conversation anchors around oil trading near $96 per barrel at the time. Historical oil high: $147 per barrel - Used in the argument that cyclical commodities often exceed prior inflation-adjusted highs. Inflation-adjusted oil high target: ~$160 to $170 - Young suggests this is a plausible baseline for a new cycle high. European natural gas price move: ~5x higher year-over-year - Used to show how extreme energy price spikes can be when supply is constrained. Journey reserve-report valuation: ~3x current stock price at $65 oil - Presented as evidence of deep undervaluation.

Pivotal Quotes: "Oil has been the most hated commodity as of late." — Trey Lockerbie: Sets up the discussion on sentiment and market consensus. "The biggest driver of oil demand growth is very poor people becoming less poor." — Josh Young: Core explanation for structural demand growth in emerging markets. "There is a pretty good argument that we exceed that." — Josh Young: His view that oil can surpass its inflation-adjusted prior high.

Implications: The episode argues oil prices and producer equities may stay elevated for years because supply cannot quickly respond. For investors, Young favors selective ownership of undervalued producers, especially small caps, over commodity ETFs; for the market, tighter supply and geopolitics could keep energy inflation alive.