In this episode of Industry Focus: Energy, energy and commodities expert Tracy Shuchart joins Nick Sciple to share her thoughts on oil, gas, commodities, and more. She discusses why she thinks the environmental, social, and governance (ESG) narrative is overplayed and where opportunities could lie in commodities.

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This video was recorded on June 17, 2021.

Nick Sciple: Welcome to Industry Focus, I'm Nick Sciple. This week, I'm excited to welcome back Tracy Shuchart to the podcast. Tracy is an expert on the energy and commodities markets with prior experience in the Chicago Board of Trade, among other finance roles. Today, she manages an energy and commodities portfolio for the Family Office and publishes a newsletter on the energy sector, in addition to being an incredible follow on Twitter with her @chigrl twitter account. Tracy, welcome back on the podcast.

Tracy Shuchart: Great, thanks for having me.

Sciple: Great to have you back. Before you hopped on, before we started recording, we were just talking about how it's been a while since the last time you came on the podcasts. The last time you came on February 6th, 2020, oil was around $50 a barrel at the time. We just had flights from China being banned, but nobody was talking about shutting down the economy, and we definitely weren't talking about all the craziness that we've seen in the macro economy over the past year-and-a-half or so. So, as someone who pays attention to the macro, what's it been like just the past year-and-a-half or so?

Shuchart: Well, obviously very crazy. At first, we saw negative $37 oil. Who would have ever thought that would be possible? Now, we're over $100 above that, so quite the move in just a little over a year. That market's seen a lot of action, and obviously we saw stocks at their lows, to making all new highs. It's been a wild, wild year.

Sciple: Yeah. One of the big themes we were talking about at that time was that even for the pandemic, there's this big, huge wall of debt coming due for folks in the shale industry, and last year in 2020, we saw a record year when it came to shale bankruptcies. Today, we're seeing the market where it's $70 oil, and that starts to look interesting. What do you make of just the current state of U.S. oil and gas production and these shale players after you go from bankruptcy to now, maybe prudish and some cash flow?

Shuchart: Right. I think they're obviously in a much better position than they actually have been since 2016 really, but I think that they're also going to be a little bit more cost-effective, they're going to be a little bit more conservative in the market. I don't think they're going to go crazy. You also have to look at the opposite end. The easy money has gone from the oil industry. With the onset of ESG guidance and whatnot with the banks, they are not looking to fund oil and coal projects anymore, so financing is going to be difficult for these guys, so I don't think that we're going to see $70 in oil then go crazy and open up the production taps like they were just because they just simply won't get funding.

Sciple: Which, from our perspective, is great as investors, because it's really, there's so much capital flowing to this industry if shale worked too well and really upset the Apple cart. You've seen OPEC try to get things under way, and maybe we'll talk about ESG stuff here in a minute. Another thing we saw coming out of 2020 is Russia getting on board with the OPEC program, and so in addition to shale maybe being forcibly made to be a little bit more disciplined, you've had the OPEC folks really get onboard in a significant way. How do you think the geopolitical landscape has changed over this period?

Shuchart: I think after a negative oil, after study turned on the taps, and then we had negative oil, all this said, I think that shocked the market so much that we started to see a very different OPEC+ alliance. We started to see them being much more cohesive groups and adhering to quotas for the very first time in years. That strategy is paid off in spades, so I think that obviously will continue. With this new administration, we're starting to see some tension in the Middle East again. That's always a worry, again for right now. We obviously have this Iran deal hanging over, which in all actuality, they're already producing 2.5 million barrels a day, they can probably tap out at four, so that's like 1.5 million barrels. The market could actually definitely handle that, and OPEC is completely aware of that. If that production should come back online, they will adjust their figures accordingly. In addition, I think that this deal is going to take much longer than people think just because of all the opposition that there is in congress. Even though we don't have to get congressional approval, Congress can put it up to a vote to make [...] get approval. So, a lot going on behind the scenes aside from all the headlines, so I think it's really going to take a lot longer than most people think. But, should it happen, the market can actually handle [...].

Sciple: Yeah, so there's been some production offline, just filling the backstory for folks with controversies with Iran, to the extent those tensions are lifted and there's no more sanction in place. That's a lot of oil potentially coming onto the market. You could say maybe not all of that was off the market during this period, but we're coming into the white side of the market, off of the black market, perhaps. When you look at maybe Shell, getting their discipline together, OPEC maybe being more constructive, should we be expecting oil to be in this $70 range? Do you think this is a market that's constructive for the oil stocks for maybe a first time in a long time?

Shuchart: Yeah, absolutely, I do. I think they're going to be very -- They are hyper-aware that this strategy is paying off. They might not be exporting as much, but they're making more money because the price is higher and I think that somehow clicked in their minds that this is actually working better for them and that will continue. I think if [...] a little bit higher. If we stay in this $70, $80 range, then we'll see stocks hold up. Except for today, because bonds are killing everything.

Sciple: Yeah, let's talk about that. Today, oil went down about 3%, I think right before we hopped on here there was the Fed news which has been constructive for the dollar. What do you think about the macro and what's going on there and how it's affecting the dollar, oil, and all this?

Shuchart: Right. I think that oil definitely needed a pull back and it's also options expiration, so there's a lot of factors and roles right now, so there's a lot of factors involved, but it's very stretched. Actually, all the markets were stretched. The dollar was oversold, lines were very oversold. This seems like a slingshot move, because the Fed wasn't really hawkish at all. I mean, 2023 is a maybe, we're kind of talking. It wasn't really hawkish. This just feels like kind of the snap-back move in markets that were to one extreme or another.

Sciple: Got it. Don't overreact too much to what's going on with the Fed from a macro perspective today. I think it's generally the answer.

Shuchart: Yeah, it's status quo right now, right? I mean, their taps are on.

Sciple: You mentioned we're in this period for the first time in a long time where oil prices are constructive for these companies. But at the same time, we're seeing these ESG pressures saying, hey, we don't want you producing oil and gas.

Shuchart: Right.

Sciple: There's a little bit of tension. The economic conditions are strong, but the shareholder may be conditioned not as strong. How do you see ESG affecting the oil and gas market these next few years? What's going on here?

Shuchart: I'm vested for the long-term, long-term meaning next 10 years out, at least. For the next decade, they're set to see oil growth in all of the projections, especially coming out of Asia and Africa. Those markets are going to still continue to grow. Emerging markets can't fund ESG projects even with help from the IMF or from other countries. I think this process is going to take a lot longer even though we're seeing bigger pressures in the West. I still think the oil and gas industry is very strong in other parts of the world, and will continue to be strong here. We're still consuming 19.3 million barrels a day in the United States, the most of any country in the world. That's not going away anytime soon. It's a contrarian bet, when you look at ESG stocks pretty much for the last six months, all they've done is gone down. If you look at TAN, the solar ETF, or any of the hydrogen stocks and things like that, they really haven't taken off, even though we've had this huge ESG push in the media.

Sciple: When you say demand, you expect it to be strong and perhaps growing over the next decade, it's this U.S.-centric story to this idea or maybe Western economy-centric story to the idea of transitioning. Do you think that the whole energy transition narrative is more narrative than substance?

Shuchart: Right now, I do. I think ESG is great. I think it's great if we have cleaner sources of energy and things like that. But my personal thought about that aside and from an investment standpoint, because I cover ESG too, looking at it from an investment standpoint, I just think there's more opportunity probably because it's so hated. You have looked at the market, it's been beaten up so much. I mean, it went from 20% of the S&P to 2% of the weighting, I mean, everything is 80% off right now. That's enticing as an investor.

Sciple: Yeah. When you have bunches of people out there saying this industry is going away and you look at the numbers saying this industry is still going to be around. Another thing that we can talk about is a lot of the biggest players in the industry getting the largest pressure to reduce their oil and gas production. You mentioned this being a Western story. I think the Europeans are really where you're seeing the largest pressure. BP saying, hey, we're not an oil and gas company anymore. We're an energy company. You've got this pressure from Shell. When you talk about what's going on in Europe, they seem to be at this accelerated pace of the ESG pressure than we're seeing anywhere else in the world.

Shuchart: They do. It's Germany-centric really. They really had that big push or the country that had the big push in Europe. And they are probably more integrated than a lot of countries, Spain too, a lot of Western European countries probably are a lot further ahead than the United States, but they're also having energy issues. Energy prices are the highest. Just yesterday, energy prices were the highest in Spain that they've been in years. They have some gas, but it's mostly nuclear, solar and wind. Last year, there was a hot summer and Germany had energy problems, so the thing is that there needs to be a transition. It's not a smooth transition and you're going to have problems, just like we saw in Texas. You need to have an energy mix. You need a transition fuel, which is gas, which is interesting because the E.U., the New Green Deal, they just decided to go, they would go ahead and add natural gas back into their plan that is an OK energy source. I think they realize it's cheap, it's abundant, and it's a good transition from fuel.

Sciple: Right. Russia is one of the largest producers of gas in the world. You've got the Nord Stream pipeline going on over there. That's been very geopolitically charged. There's been gas shortages over in that part of the world. Even despite some ESG issues, sooner or later, something's got to give with that pipeline and gas production to that part of the world.

Shuchart: Yeah, absolutely.

Sciple: We talked about Europe a little bit. In North America, we've also got kind of activism going on. What do you make of what's going on with Exxon? Exxon, for the longest time, has stuck to their guns with investing and oil production, and then you've had this push in from Engine No. 1. They really didn't buy a massive amount of stock, but they did gain some board seats. What do you see going on here and what you make of Exxon?

Shuchart: I really liked Exxon, just because they were the only major to kind of stick with their plan of being an oil company and not being like an integrated energy company. Engine 1 got two seats. I think we need to wait and see. There is always a chance you could see some upset there. It is something I'm watching very carefully, but I don't know how much two seats will actually do. But we'll keep an eye on that. But it's certainly interesting and that only makes me more bullish. The sector of the lower tier, middle to lower-tier companies and frackers in the U.S.

Sciple: Right. That raises the follow-up question. We're in this world of lots of this activist pressure, ESG, pressure on the big oil companies. You think of the big oil companies being the most sophisticated operators, the ones that maybe have the lowest breakevens, that sort of thing. You push these people out of the market, there's still going to be demand for oil and gas, as you said earlier, who benefits? Is it these small oil producers? Is it Russia and Saudi Arabia? What do you think happens?

Shuchart: Well, I think it's going to be both, because we have oil flows. Russia and Saudi Arabia produce very different oil. Russia produces heavy oil, Saudi Arabia is kind of medium oil, and the U.S. is very light oil, so there's a market for all of those oils. There's definitely a market for the U.S. and in 2015 we just became an exporter, so I definitely think that this environment that they are creating with the majors is going to be very beneficial for some of these smaller fracking companies in the United States.

Sciple: Another topic, you may not know this, but our listeners to the podcast know this. I've recently joined The Fool Canada team, so I've been paying attention to some of the goings-on in that country. You see that some of the Canadian oil stocks also have been bombed out somewhat and there's a little bit different environment maybe in that country around oil production than you see from the majors in the U.S. What do you make of their positioning? That's another sub-sector, the Canadian oil sands folks haven't received a lot of love for a long time, but the market is coming to where things could be supportive for them.

Shuchart: Yeah, I definitely think the market is starting to be for, and yes, oil sands have been hated for much longer than frackers have. But there's definitely a market for their oil and what is left of their production if the government hasn't totally shut it down. I think that the companies still remaining there will be very beneficial because there is a very big market for that. If they could capture the Chinese market, if they could get extra pipeline capacity built to the West Coast, they could also sell to China, whereas most of that oil goes to the United States.

Sciple: That's another scenario we've seen over the last couple of years of really difficult to build pipeline capacity, whether it's the Keystone XL pipeline or we've seen some more consolidation in that space. Do you think we need more pipeline construction to stimulate the [...] market or is that not important?

Shuchart: I think that project getting canceled can throw a wrench in the Canada-U.S. relations. When other issues come up such as the U.S. likes to go after the Canadian dairy industry, I think that Canada will put their foot down there a lot more. Looking at other commodities, trade between the two countries, I think, could be affected because Canada was very upset about that project being canceled.

Sciple: The thing that this all comes back to you at some point or another, there's so much international trade going on here, the geopolitics going on in these economies. Before we move on from oil, as you mentioned small frackers, were there any names that come out to you as these are the folks that I consider on the shortlist of primary beneficiaries?

Shuchart: Yeah, I mean I really like Devon Energy, I've liked them for a while. I like Schlumberger for services. I can't think what I have on at [...] the top. I'm not by my computer right now. If you want an ETF, if you look at something like OIH , that's just starting to break out of a multi-year descending wedge. If you prefer to play an ETF and a basket or something like that, I think services will do extremely well.

Sciple: Do you think that's just production coming online to meet these commodities? Because I think services has been another area that has been in a really tough spot. Part of what's brought breakevens lower is service prices that have come down so much. Do you see there being a shortage of servicers in the next few years?

Shuchart: I think that's going to happen. If we look at the curve right now, this is a very tight market, believe it or not. You have [...] exploding. The backing came in about $1 or so, that [...] came in about $1 or so today, but if you look at Yuzhnyi, it's still exploding higher. So [...] is still very prevalent in this market and getting more [...], that means in the future we're looking at a supply problem, so they are going to have to bring on more supply even though I think it's going to be difficult for them to get funding so services will definitely be needed as they have to bring out more production.

Sciple: Absolutely. We spend a lot of time here on oil and gas and I think there's lots to talk about here. I know you follow some other areas of the macro-economy. One of the big themes so far for the year has been inflation, you've seen explosions in things like used car prices or lumber for a while, though lumber is cooling off. What are some things that stand out to you in those areas?

Shuchart: Well, long term, especially if you're really looking at base metals, I'm really bullish on base metals long term, again, we've seen a pullback here, on the technical side, it was very overbought and then you also had China come in and say, we're going to release from our SPR but for metals, because they're trying to control prices but it's very uneven, we're seeing a pullback in nickel, but stainless steel, for example, is still moving higher. I think China is trying to control the market and control commodity prices. But I don't think that they're going to be able to do that because if we look forward and if we want to meet all these demands for electric vehicles and things like that, then we're going to need a lot of these base metals and we simply don't have it. The problem is that it's not China, China can't control the price if the world is undersupplied.

Sciple: Right. I think one of the big themes we've talked about so far and that's kind of emerging is, No. 1, there's a narrative of oils getting replaced by these other energy sources. However, if you look at demand, you are still going to need the oil. Also, to the extent oil is going to be replaced by some of these energy sources, we need a lot of these other metals and commodities and things like that. Across the board, it sounds like commodities need to move higher.

Shuchart: Yes. I mean, that's really what I am looking at in the long term, and I am not looking at the day to day moves when I make those decisions and a lot of people are, "Are you still bullish after today, it came down 3%?" Yes, I am still bullish [...]. Over the long term, yes, because we have all of these ESG goals, look at all the car companies that are coming out with new electric vehicles and we just simply don't have the supply. I like miners, things like Vale or Cleveland-Cliffs, which is just a metal supplier, so those are kind of some of the companies that I'm looking for, for base metals.

Sciple: Yeah, that makes a lot of sense as the economy rebounds and we try to restart some of this production and everybody wants houses and all these sorts of things. You need to produce these things and also there has been massive under-investment in the sector, if you look back over the last decade and that bill is coming due.

Shuchart: Absolutely. The commodity sector I think is going to remain strong over the next five, 10 years, at the very least for certain just because of everything that's happening. The transition is going to require that and as far as the oil and gas, like we said before, demand is still set to grow for up to the next 10 years.

Sciple: Yeah. Those mines need backhoes and all those things, these mines need energy supply too to make those things happen, so it takes some investing. We've talked about this kind of theme emerging, kind of bringing things together. As you look out over the next, say, 18 months, right, maybe the next time you come on, the next 18 months, what are some themes that we should be paying attention to in the macro economy in this oil-gas commodities universe?

Shuchart: Well I think, obviously inflation is going to be the big thing, right? Is it transitory? I think the Fed obviously expressed a little bit of concern, but I think that really would let it run hot and I think Yellen came out today and said, we're not worried about hyperinflation, which makes me worry about hyperinflation.

Sciple: Looking where the bodies are buried, right?

Shuchart: Right? But I think that's going to be a big play. Then, obviously is the Fed going to taper or not? I think they're going to talk about it and think about talking about it and then talk about it some more, and then probably push that off and then talk about it again. I really don't see that happening in 2023, unless it's maybe a one and done. But I think they're going to fear of repeat of 2018, when they tried to taper and tried to raise, and quickly had to reverse that.

Sciple: The Fed, certainly something to watch. Another theme that we see emerging, I can't tell you the number of times in the past week or so I've seen the phrase "super-cycle" and seen the phrase "$100 oil." What do you think? Do you think that's hype or do you think there's a real story there?

Shuchart: I do think we'll see a commodity super cycle only being in the fact that we're going to need so much more. It's expensive, it's energy-intensive to mine all of these things. $100 oil, if we even got there, I think it would be so brief, because I think OPEC and everybody is going to try as best as they can to keep it in that $70, $80 range. I don't think we're going to see $100 oil this year. I could be wrong, but I'm of the opinion that we probably will not see that and I think everybody is pretty comfortable at that $70, $80 range. We've moved up so much and so quickly. It wouldn't shock me if we're sideways market for a while.

Sciple: Yeah, that makes sense, and I think as a consumer, we don't really want crazy volatility in oil markets. We saw crazy volatility last year, we saw crazy volatility with this craziness with the pipeline. I think it makes things challenging. If we've got OPEC pushing oil prices up to $100, that maybe is a world where there wouldn't be as fun delivery, who knows.

Shuchart: I don't think they want that either because that really hurts emerging markets. Places like India, they can't really handle paying those prices. They're trying their best to keep that where people are making money and emerging markets aren't blowing out.

Sciple: Tracy, thank you so much for joining us. Always love having you on to talk about the macro economy, what's going on in oil and gas. Great to get your perspective. If folks want to keep up with the work that you're doing, where can they find you, where can they see your work?

Shuchart: I'm on Twitter, @higrl, C-H-I-G-R-L, and then also I write for Hedge Fund Telemetry and if you want, you can go on there and you can get a free two-week trial and you can also read everything that I've written since.

Sciple: Since forever. Awesome. Tracy, I'll throw a link in there in the description of the podcasts and can't wait to have you back on again soon.

Shuchart: Yeah, absolutely. Thanks.

Sciple: As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for mixing the show, for Tracy Shuchart, I'm Nick Sciple. Thanks for listening and Fool on.