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Warren Pies: The Era of Cheap Oil is Over

Tom welcomes Warren Pies to the show. Warren is cofounder of 3Fourteen Research.

Warren explains how they attempted to map out how bear market rally’s typically behave. These rallies have to fail and head below previous lows. In our current case, that would be, 3066 on the S&P 500. They examined forty-nine historic rallies, and six of them we’re larger than today. We’re in fairly rare territory. Usually, when we see these types of moves, the bear market is almost over. However, the difference this time is we may be facing a recession and the Fed seems likely to raise rates further. This should give investors caution.

Bond markets have been signalling for some time that inflation will be transitory. Yield curve inversions are often correlated with a coming recession. The Fed may be on the verge of making a policy mistake.

Their model for determining future recessions is worsening. They use a number of factors including various credit spreads, rate of change, equity market returns, and analysis of the yield curve. Most of the yield curves are inverting, and inversions often signal a recession in 16 to 24 months.

He discusses their outlook for inflation and why housing is likely to slowly burn higher. Energy and housing components are sixty percent of the CPI. Food inflation is also a factor.

The high costs of refined petroleum products like gasoline is affecting consumers, but most have been fairly flush with cash.

The playbook we saw with Covid could become a policy tool for managing global energy requirements. Governments may choose to balance shortfalls with energy with similar lockdowns.

Russia will have a hard time transitioning from Western to Eastern buyers. This is due to a lack of infrastructure, pipelines, and shipping options. Much of the world is going to face further energy shortages.

They have conducted some analysis of peak hydrocarbon usage. They believe demand will continue to grown until at least 2040. We can only electrify and expand the grid so quickly. This transition has been haphazardly organized. Bottom line, the era of cheap oil appears to be over, which will continue to pressure inflation.

Warren discusses the key features of their gold model, which helps them determine good entry and exit points.

He discusses why they recommend large cap Canadian oil producers.

Lastly, Warren outlines where inflation will head over the short, medium, and long term. Stocks and bonds have become more correlated than many investors expect. Bonds may no longer be a safe haven, and the coming years are likely to be more difficult.

Time Stamp References:
0:00 – Introduction
0:55 – Bear Market Rallies
4:46 – Rate Hikes Priced In?
7:30 – Bond Markets
8:56 – Recession Model
11:26 – Recession Counterpoints
16:20 – Inflation Drivers
19:26 – Energy & Consumers
22:20 – Energy Supply & Prices
27:35 – Oil Reserve Releases
29:48 – Energy Backwardation
33:58 – China, Oil, & Copper
36:20 – Peak Energy Analysis
39:10 – ESG & Capital Allocation
41:50 – Gold Model
45:45 – Energy Market Plays
49:14 – Investing in Miners
51:36 – Inflation Outlook
57:10 – Commodities Bull Market
59:20 – Wrap Up

Talking Points From This Episode

  • Examining past bear market rallies for context with today’s markets.
  • Their recession model and why it’s increasingly worsening.
  • Global energy demand and why continued demand growth in petroleum is almost certain.
  • There inflation models and problems with the bond market as a safe haven.

Guest Links:

Before founding 3Fourteen Research, Warren led Ned Davis Research’s Energy and Commodity strategy. In that role, he built the firm’s commodity-related studies, models, and unique indicators. His research combines proprietary fundamental, technical and macro indicators to identify major investment themes and market trends affecting capital markets.

Warren is a frequent contributor to the media, including participating in the 2013 Barron’s MLP Roundtable discussion, the Wall Street Journal, CNBC, and RealVision. In 2014, Euromoney Institutional Investor awarded Warren the Padraic Fallon award for his research on the Shale Revolution. Outside the research world, Warren has worked as a practicing attorney, specializing in regulatory approvals for various industrial activities and projects. He has also owned, operated, and sold a portfolio of self-storage properties to a national REIT.

He earned both his Bachelor of Science and Juris Doctorate from the University of Florida. Warren is an Energy Risk Professional Certified by the Global Association of Risk Professionals.

At 3Fourteen, Warren works closely with a team of analysts, data scientists, and developers whose expertise ranges from machine learning, time series analysis, and application development.

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