Why Goldman Sachs is Predicting Higher Oil Prices | Top of Mind Series

Welcome back to another episode of the Invest Like a Billionaire podcast. I'm your host Ben Fraser, joined by fellow host Bob Fraser. And today we are going to be giving you another top of mind episode. These are shorter episodes where we're talking about different things we're seeing in the economy, different headlines that we're seeing, and questions that are being asked from our listeners. And so today we wanted to talk a little bit about what we're seeing in the oil and gas market. And so if you're looking, you know, last week and into this week, we're starting to see prices trend up on Brent in crude oil actually touching $90 a barrel, which is definitely higher than it has been in recent past. And so there's a few things going on and we've been talking a lot about oil and gas over the past few months. It's actually an asset class we're very bullish on and have a lot of excitement around and wanted to kind of just tease out some of the things that are going on in the supply and demand because it is an ever-evolving topic. So Bob, you want to kind of break down a little bit of what's going on recently? Why are we seeing this, you know, tick up and substantial tick up in price here past few weeks? This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Looking for passive investments done for you? With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal, so our interests are aligned. We focus on macro-driven alternative investments so your portfolio is best positioned for this economic environment. Get started and download your free economic report today.

So this is based on an article from Goldman Sachs, who we very much respect as, as a bank that does research. And they're basically saying oil prices could hit $107 a barrel, uh, if OPEC extends their cuts into next year. So Their cuts are scheduled to go through December, production cuts, and they're doing that to, to, you know, to elevate prices. So they believe that, you know, they could go up to $107. Now, they're interestingly saying it, it really can't go much above that or really maintain a price above $100 a barrel because OPEC doesn't have interest in doing that. And the reason they don't have interest in, in oil over $100 a barrel is because they'll see increased competition from U.S.-based producers. Um, so, uh, so it's— so we, we kind of agree with that. We, we think that oil prices are gonna, you know, stay somewhere between, let's say, $80 and $100 a barrel for a while. And that's as long as China continues in its kind of slow growth, uh, slash recessionary kind of recovery— non-recovery in their, their economy. They're the big wildcard. So we're not, we're not seeing demand, oil demand kind of, you know, increasing right now because of the slower economy. So we're continuing to see supply kind of plateau and peak because of lack of investment globally and, and because of these oil cuts. So it really is a very good, you know, buying opportunity right now to begin to continue buying oil assets.

Yeah, it's really interesting. It seems like OPEC theoretically has found this Goldilocks zone, right, where they can keep prices higher than, you know, where everyone's kind of making more money. They're making good money at $80 and $90, you know, a barrel of oil, but it's just not high enough to where it's, you know, accelerating the investment into new production, you know, in the US and other areas at a big enough level that's going to now increase supply and then, you know, put some pressure on prices to come back down. So it is kind of an interesting thing. We'll see how that plays out. Also looks like Russia is claiming that they're also going to make some production cuts, but who knows if, you know, that's more of a, you know, good PR on they actually can't sell their oil or if it is true that they're trying to make production cuts.

Right. So longer term, we still think oil is going to— is got a ton of upside to run. Once the economy of the world kind of hits in high growth mode, because it's been, you know, investment in fossil fuels has been just massively underinvested for the last 7 years. So it's— there's not enough supply down the road. So right now there's enough, but there won't be.

Yeah, we're kind of in a funny spot, you know, from an investment standpoint where we like to see the higher prices because in the you know, oil fields that we do own and the production that we are making, we like to sell into higher prices, but we're also really net buyers right now. We want to buy as much as we can. And so we don't want to go too high because, you know, there's— it might create more demand from an investment standpoint, capital deployment standpoint, and, you know, limit the opportunity. So, you know, it's interesting to see this play out. And it's a tie-in to some of the other things we've talked about over the past several months. What you're saying is, you know, we're kind of this, this weird conundrum where supply, you know, it has been decreasing. It's been on this, you know, pretty steep decline curve. But, you know, our demand is kind of, you know, gone in line with that. And especially as we talked about China maybe facing deflation a few weeks ago, they're the real big wildcard here. Right. So if their economy turns around and they start having higher demand, as soon as that kind of demand trigger, you know, crosses that supply threshold, it's going to be very interesting to see what happens because the supply of production is pretty inelastic. Right. It takes a long time to put on new production to, you know, do all the, you know, vetting and permitting and getting new wells drilled and producing. And so it is a really interesting thing where even right now we're seeing higher prices than normal, but it still feels like we're in this still a bit of an early energy crisis going over the next couple of years where we are going to have a severe supply crunch. And, you know, we've talked a lot about long-term themes of oil and demand for that. It's still being pretty, pretty strong even despite alternative energy sources. So another kind of angle I wanted to tease out with this, because it's interesting to kind of understand what's going on there and how that plays into oil and gas. Investment themes, but it also plays into another theme that we've been following for a while. I've been saying, hey, inflation is likely going to be stickier. And now it seems like everyone's saying that, but we've been saying that for at least a year now. And part of the reason is, you know, CPI is going to be hard to get down to 2% level. And a lot of what makes up is housing and energy. And if you just listen to Jay Parks's episode last week, you If you have listened to it, go to Joe right now. It's, it's an incredible episode. He's the chief economist at RealPage studying housing and all the supply demand capital markets of what's going on there. Very, very fascinating. And he's actually making a case that there is a lagging time frame for the reporting on housing numbers. So housing, you know, rent increases or decreases. Into CPI and that, that actually is going to be going downward. But meantime, we also have oil prices that are ticking up and that's actually another, you know, component of CPI and driving up inflation. So there's still this kind of, you know, a lot of different things going on. And I don't think there's any high level of confidence yet that the Fed's going to be dropping rates anytime soon. But you have any kind of thoughts on that, how this kind of plays into this longer-term inflation?

Right. And yeah, he's, he's right. So if you actually look at the components of the Consumer Price Index, the largest single component is shelter and everything related to shelter housing. And so we have actually seen rents drop year over year. Right. Just, just, just recently. And so as that gets factored into CPI, we're going to see CPI coming down, Consumer Price Index. So the inflation is actually going to be— inflation numbers, the headline numbers are going to be coming down in the short term. That's the largest component. And a non-component of inflation is energy. It's really not a component, but it's underlying almost everything, right? It, you know, everything goes in because, you know, the diesel fuel for transportation, the diesel fuel for agriculture. Everything is underlying, but it's actually not a factor of CPI, but it affects a lot of things. And, and so where we see energy prices going up, you know, long term and of course they're up right now, $90 a barrel. So, so what we're probably going to see is inflation being softer for the next 12 months, you know, really coming down quite a bit because of the housing numbers. As they get factored into the housing numbers. But we're going to see, you know, see those numbers again not coming down as far as they could because of energy. And again, as the housing numbers equalize and kind of slow down, we're going to see the energy numbers continue to have impact. So, so medium to short term, we'll probably see CPI coming down. Medium term, we'll see it. We see it ticking back up into you know, more uncomfortably high areas, you know, again, probably 4 to 6% range where we see it, the medium term and probably before that, well, we might see it down, you know, 3 and below. So that's kind of the— what the crystal ball is saying from my side.

The ever-evolving crystal ball, because there's a lot of things going on. But, you know, it's— you got to— I love what you said a few weeks ago where when you're trying to evaluate all this different data, right, one of the biggest things you need to do is look at scale, right? What's, what's the impact? How big of a factor is this? Right? Because anything on its own can be pulled out as a headline and this is happening, right? But is— does this really affect the bigger picture? Right. And does this actually move the needle? And so I think that's really a lot of what we're trying to do is understand, you know, what are the bigger factors and forces that are moving in the market and impacting some of these things. So hope you enjoyed this, this little short episode. And if you are enjoying it, please do subscribe so you get notifications. We put these out every Monday along with our normal episodes on Thursday and definitely leave a review and share with somebody if you're enjoying this. We appreciate you helping get the word out. It's been awesome to see the growth of our listeners and the feedback we've been getting. Thanks so much.