Why write about October when November is so dramatic?!  The landslide win for Democrats in the US election has created a dramatic market re-think across multiple energy-related issues – Iran, oil prices, data centers, and Venezuela to name a few.  There is a lot of dust in the air.  As it settles, we suspect that the pre-election future and the post-election future will not look that different in many cases.  We believe the Iran conflict just got more difficult to solve.  We believe that data centers will move forward, albeit more slowly.  These are the types of high-level, hard-to-know-for-sure situations where clarity will come gradually, not quickly.  There is always money to be made in chaos.Note – Throughout this writeup, we discuss election results and implications.  Our observations are intended to be apolitical and analytical, not a view on election results as right or wrong.

Iran Conflict

• Let’s recap the pre-election status of the Iranians – they’ve taken a significant military pounding from the United States, had a meaningful component of their leadership killed, lashed out intermittently at their Gulf States neighbors, have an ongoing campaign against tanker traffic in the Strait of Hormuz, are exporting zero oil and are being subjected to a significant economic embargo.  And yet they refuse to give up and refuse to back away from their (aggressive, in our opinion) demands.
• The US Blue Wave just showed the Iranians their adversary is politically weakened.  This could make a peace deal potentially more achievable (via pressure on a theoretically weakened Trump), it also hands more leverage to the Iranians.  Given the history since late February, we suspect Iran will translate this leverage into more aggressive demands at the bargaining table, perhaps accompanied with an intensified military campaign to “raise the heat” in Washington.
• Meanwhile, President Trump is still the Commander-in-Chief and now has (in the view of some) a tarnished legacy to protect/refurbish.  With ego involved, it is tougher to TACO.  Having shown no willingness to accede to Iran’s pre-conflict negotiations, it feels like there is little likelihood of President Trump caving to potentially more aggressive Iranian demands.  One could even argue that Trump might follow-through on his pre-election threat to militarily escalate the situation before the Blue Wave legislators arrive in Washington DC in a few months.
• Meanwhile, incoming Democrats are about to learn that campaigning against the Iran conflict is easier than fixing the Iran conflict.  We believe Democrats can make it more difficult for Trump to maneuver, but can’t end the war on willpower alone.  If Democrats win the Presidency in 2028, all Iranian possibilities are on the table.  But 2028 is a long way away.
• Bottom line – we believe Iran will be emboldened on the margin, while the US will be weakened on the margin.  This is not a recipe for a quick, acceptable end to the conflict.  This is a recipe for more of the same (best case) or an escalation of military action by either side.

Oil Prices

• WTI was $104/bbl in the week before the election as Trump threatened a return to military action after the US midterms.
  
• Oil started a downward move as rumors of peace talks emerged in the days before the election.  This is consistent oil market behavior throughout the conflict.  The willingness of WTI traders to still give credence to these types of rumors is somewhat baffling to us, but the price on the screen is the price on the screen.  Oil was $96/bbl on election eve.
  
• The Blue Wave created a one-day death spiral for oil (down $8/bbl, -8%) as the market evidently assumed a quicker resolution to the Iran conflict and reduced the overall risk premium.  As we discuss above, we think this is a bad take, as political gridlocking and Iranian behavior is likely to illustrate in coming weeks and months.
  
• Readers of our commentary know we’ve been harping for months on supply/demand/inventory and barrel-counting.  Current levels of traffic through and around the Strait of Hormuz is strong and the oil market is balanced if 12-14mmbopd can keep moving through.  Of course this is tenuous.  It doesn’t feel like it will ramp up from here and could certainly ramp down.
  
• While we think the knee-jerk selloff in crude was probably misguided, the move doesn’t put WTI into cheap/compelling territory.  Front month $88 is still a reasonable price for the risk at play.  The last time peace was breaking out (summer 2026), FY2027 WTI fell to $65/bbl.  The subsequent realization of a longer Iran conflict took it all the way up to $87/bbl.  Recent events now have it trading ~10% lower at $79/bbl.  Almost smack in the middle of our $75-$85 expectation for the next few years.
  
• Whether the recent oil move was right or wrong, market watchers should pay heed to the trading signal.  This is the second datapoint the oil market has sent (the first was Summer during the Iran/US cease fire and MOU).  When peace eventually breaks out, oil is going to trade down for a while.  The perception of a Middle East-driven glut clearly outweighs arguments of low-levels of inventory and the need to refill commercial and strategic storage.
  
• US export ban appears to be off the table.  For part of September, it looked like the Trump administration was going to implement a temporary export ban on US refined products.  There are many reasons why this is a bad idea, including starving global allies of much-needed product, disincentivizing investments by the US energy industry (producers through refiners) and setting a capital-spending-killing precedent of explicit market intervention.  Fortunately, the concept seems to have died, aided by the G7 announcement (discussed above) and intense pushback from the energy industry.  There should be less export ban risk following the US midterms, but future price spikes will inevitably resurface the issue.

Data Centers

• We are believers that AI is a massive, productivity-enhancing, game-changing technology.  The election results will slow the buildout of AI on the margin, but this freight train isn’t going to stop.
  
• Our colleague Josh Martin recently made a great comparison between the pushback to data centers and the pushback to fracking during the shale boom.  Hydraulic fracturing unlocked US energy independence. During the height of ESG, many people hated it and wanted it banned.  There was a lot of noise, NIMBY pushback and things went a bit slower…. but better rules and regulations were adopted and the fracking train rolled on because there were compelling economics and compelling growth.  Feels quite analogous to data centers.  The use case is too significant.  If some states/communities don’t want them, they’ll get built somewhere else.
  
• Texas has been a beacon for potential data center projects given land availability, access to water, access to natural gas, less NIMBY attitudes and a business-friendly climate.  The election of Gina Hinojosa as governor will slow things down given her campaigning around a data center moratorium to enable more community protections.  Slow does not mean dead and Texas-slow is probably better than other-places-slow, which means Texas may actually have increased in attractiveness after the Blue Wave.  Without question, delays are painful (just ask all the AI infrastructure, chip and behind-the-meter power generators getting annihilated recently in the public markets), but the growth trajectory is still very much alive.
  
• Poor natty gas, it just can’t catch a break.  Natural gas consumption for data centers has been pegged at 5-10bcf/day by 2030.  That number is now probably a “by 2032” forecast.  Please God, don’t let LNG exports come into the crosshairs (we don’t think it will).

Venezuela

• Like many other things, investing in Venezuela got more challenging given the election results.  We still take the “over” on assumptions Venezuela oil production hits 2mmbopd in the next five years.
  
• Deploying capital in Venezuela assumes a player can get access to the fields/hydrocarbons, access to infrastructure and support from Venezuelan and US governments so that bad actors can't siphon the profitability to unacceptable levels.  The odds of ongoing US support went lower with the Blue Wave.

Industry Behavior

• The energy dynamic in the short term is all about beta (geopolitical, oil price, US politics) and relatively little about alpha (company specifics).  Two consistent themes remain ingrained in the industry – capital spending discipline and consolidation.  
  
• We see no evidence via initial Q3 earnings reports that upstream energy companies are going to use strong current cash flows to bump up growth spending.  Hurray!
  
• Energy companies keep buying each other.  EQT paid a healthy 20% premium to acquire Range Resources and move back atop the leader board as the biggest gas producer in the United States.  Ovintiv bought Logan Energy in Canada and Carl Icahn’s CVR Energy bought $4B+ of refineries from Marathon Petroleum.  We’ve been saying it for several years – consolidation is going to keep happening until energy assets get expensive (and they aren’t yet).

Energy Equities

• For energy stocks, it was a good October, a terrible start to November, and the volatility remains high.  As we write, the diversified energy ETF (XLE) is down ~10% from its all-time high set at the end of October.  Anything that had gotten a bump for AI-related exposure is down 2-3x that amount.  This translates to an attractive, but not table-pounding, opportunity.

As always, we welcome your questions and comments.

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(1) Bloomberg