TIP572: Finding Value in the Oil Market w/ Josh Young

Episode Summary

Executive Summary: Josh Young argued that the oil market remains structurally tight despite volatility, driven by OPEC underinvestment, rising OPEC+ cuts, improving demand from China and U.S. freight, and likely flattening U.S. shale productivity. He also said Buffett’s energy moves signal optimism on upstream oil assets, while high rates and weak inventories are constraining future supply.

Main Topics: Oil market developments in 2023 (Priority: 5/5): Josh said the biggest surprises were Russia’s exports holding up better than expected and China’s reopening creating mixed demand—strong in gasoline/jet fuel but weaker in petrochemicals and diesel. OPEC+ cuts later offset these factors and pushed the market back toward deficit. Buffett’s energy positioning (Priority: 4/5): The discussion covered Berkshire’s large Occidental and Chevron stakes, plus its natural gas infrastructure moves. Josh interpreted Buffett as bullish on oil and upstream assets, but more cautious on refining and more selective as valuations changed. OPEC, spare capacity, and underinvestment (Priority: 5/5): Josh argued that OPEC likely has less spare capacity than commonly believed and that public warnings about underinvestment reflect real supply concerns. He said producers are trying to avoid a price spike that would destroy long-term demand and trigger more non-OPEC supply. China demand, stockpiles, and strategic buying (Priority: 5/5): Josh said China is still early in its per-capita energy growth and may add significant demand over time. He views China’s strategic petroleum reserve buildup as intentional preparation for future consumption rather than speculation or a bearish sign. U.S. shale rollover and inventory constraints (Priority: 5/5): Josh warned that shale productivity per rig appears to have peaked and that fewer drilled-but-uncompleted wells reduce the industry’s ability to respond quickly to price spikes. He sees a meaningful risk that U.S. oil production could decline without more rigs and pressure pumping. Energy transition, solar/wind skepticism, and capital discipline (Priority: 3/5): Josh argued that current solar and wind economics rely too much on subsidies and still depend on fossil-fuel-intensive supply chains. He prefers solutions that increase reliable energy supply and criticized policies that make energy scarce or expensive. Market timing, macro uncertainty, and rates (Priority: 4/5): Josh said timing macro turns is difficult because data are noisy and the economy may already be recovering from a recession-like slowdown. He also argued that higher interest rates are suppressing capital investment, which tightens energy supply.

Key Arguments: Russia’s oil exports did not collapse as expected, offsetting part of the bullish supply thesis and weighing on prices. China reopening has been mixed: gasoline and jet fuel demand are strong, but petrochemicals and diesel have been weaker. OPEC’s repeated warnings about underinvestment likely reflect real concerns that spare capacity is limited. China is building strategic and commercial inventories because it expects higher future oil use and wants a buffer against shortages. U.S. SPR drawdowns and falling commercial inventories leave the U.S. in a less secure energy position than before. Shale productivity appears to have peaked, and reduced drilled-but-uncompleted well inventory limits the industry’s ability to rapidly raise supply. Buffett’s Oxy and Chevron positions suggest a bullish view on oil assets, with Chevron’s refining exposure and valuation playing a role in his trimming. Large integrated oil companies are not necessarily better shale operators than smaller, more nimble producers. Higher interest rates reduce capital spending across energy, worsening supply tightness and supporting long-term oil prices. Solar and wind are viewed as imperfect, subsidy-dependent technologies that do not yet displace fossil fuels cleanly or efficiently.

Data Points: WTI crude price at time of recording: about $82 per barrel - Clay and Josh discussed the recent move from around $90 to the low $80s. WTI crude prior reference: around $90 per barrel - Price level during Josh’s previous appearance on the show. Berkshire Chevron stake: $21 billion - Clay cited Berkshire’s recent quarter holdings. Berkshire Occidental stake: $13 billion - Clay cited Berkshire’s recent quarter holdings. Berkshire LNG terminal investment: $3.3 billion - Berkshire agreed to boost its stake in a Maryland liquefied natural gas export terminal. Texas gas-fired power plant proposal: at least $10 billion - Berkshire supported a bill for Texas natural gas power plants to back up the grid. Natural gas price mentioned: around $2.60 per MCF - Current U.S. gas price referenced during discussion. Natural gas forward curve: winter 2024 over $4 per MCF - Josh said the curve is in contango and winter 2024 prices are much higher than spot. Oil forward curve: backwardation; year-ahead contract $5–$10 below spot - Josh explained that oil futures are priced lower for future delivery than spot. U.S. shale rig decline: from 800 to 670 rigs - Josh referenced the recent fall in oil drilling rigs. Private drilling share of rig decline: nearly 70% - Clay cited the Wall Street Journal article on shale production slowdown. U.S. rig count peak timing: Q4 of last year - Josh said drilling activity peaked around the fourth quarter. Drop in U.S. SPR from recent high: about 50% - Josh said the SPR is now around half its recent peak level. Chinese storage utilization: about 60-something percent - Josh estimated China’s SPR plus commercial inventory utilization level. Oil demand mentioned: around 101 million barrels per day - Clay referenced current global oil demand. Potential incremental China demand: 2 to 4 million barrels per day - Josh estimated possible future demand growth in China. China consumption range cited: roughly 16 to 17.5 million barrels per day - Josh referenced differing estimates of current Chinese oil demand. U.S. energy sector market cap share: about 4.5% of the S&P - Josh said energy’s market cap weight had risen slightly from about 4%. U.S. energy sector earnings share: about 10% of the S&P - Josh argued this was still far too cheap relative to earnings. XLE performance since 2015 launch: about +10% - Josh used this to compare large-cap energy exposure. Small-cap energy index performance since 2015: about -65% - Josh contrasted small-cap energy with large-cap energy and his own strategy. Bison strategy performance: about +115% net of fees - Josh cited his fund’s long-term outperformance in small-cap energy. Oil production surprise from Russia: exports did not fall by about 1 million barrels/day as expected - Josh’s earlier forecast did not materialize. Potential U.S. inventory structural buffer: roughly 100 million barrels - Josh said this portion of commercial inventory is effectively structural working capital.

Pivotal Quotes: "The simplest explanation is probably correct here, which is just that there is limited spare capacity in OPEC." — Josh Young: Explaining why OPEC keeps warning about underinvestment and supply shortages. "They’re buying it to store it, to use it." — Josh Young: Describing China’s strategic petroleum reserve and commercial inventory buildup. "The more confident I feel in something, the more scared I am, and the less likely I am to really go buy more of it." — Josh Young: His investing philosophy on taking positions when uncertainty is high and prices are compelling.

Implications: Listeners should expect a market that remains vulnerable to upside oil shocks if shale underperforms and OPEC capacity is tighter than believed. Energy equities—especially smaller producers—may still offer value, while China and rate policy remain key demand/supply swing factors.