.webp)
| Benchmark | MTD | QTD | YTD |
| S&P Composite 1500 Energy: | -5.0% | -12.9% | 20.5% |
| S&P Global Clean Energy: | -15.4% | 10.5% | 21.7% |
Energy Macro
During June, the US/Iran conflict moved from a cease fire phase to an MOU (Memorandum of Understanding) phase. This further step toward peace had stock markets rejoicing and oil markets tanking. Front-month WTI was ~$90/bbl on June 10th as MOU signals emerged from President Trump’s social media posts and Axios news reports. It was ~$81/bbl on Monday, June 15th following the Sunday signing of the MOU, it was ~$77/bbl going into the US Juneteenth holiday (June 19th) and is ~$70/bbl as June ends. This is despite intermittent flare-ups, drone strikes and missile launches.
Why has downside momentum clearly gripped oil markets? Below we list some reasons/catalysts. For the record, we don’t agree with them all, but it's always important to understand each side of an argument.
- The US appears unwilling to return to sustained kinetic actions against Iran. A pattern has been established - “don’t worry” commentary and weekend-only retaliatory action by the US. The goal seems to be to avoid spooking equity and oil markets, which has created the perception (and reality for now) that the worst is over in the Middle East and oil volumes through the Straits will trend higher.
- More supply IS moving through the Strait of Hormuz. Outbound and inbound tanker traffic IS trending higher. Oil markets don’t care what type of jawboning or one-off drone strikes are occurring, they care about incremental Middle East barrels reaching end markets….which is happening.
- China has not yet returned to importing crude. China was the big equalizer in the oil markets over the past few months. Rather than import high-priced crude, they shifted consumption to internal inventories to the tune of 5-6mmbopd. This kept oil prices from spiking even higher during the conflict. Some have equated China’s drop in imports to demand destruction. Until China returns as a buyer, short-term physical crude demand will be lackluster.
- The IEA is warning of a supply glut in 2027+. The IEA indicates supply will grow by ~8mmbopd in 2027, overwhelming demand. There is a lot of guesswork in the numbers, but if one assumes a conflict-induced reduction in supply of 10mmbopd for six months (March-August), this is an annualized 5mmbopd of the IEA’s “incremental” supply. Leaving 3mmbopd to come from other sources such as new/higher production from countries like Saudi, UAE, Iraq, Iran, Venezuela, Guyana, Brazil, US and Canada.
(1) Bloomberg
The above information does not constitute investment advice. Please note that these unaudited estimates have been prepared in accordance with our typical procedures for estimates and as such, final month-end prices may not have been received for all positions. Performance for all strategies is net of fees. Returns have been adjusted where applicable to reflect the highest level of fees available. The PEP Energy Equity Opportunities strategy performance is that of an investor invested in the USD share class of the one-year tranche. The performance calculation assumes that the investor’s account participated fully, on an applicable pro forma basis, in all investments, and was assessed a 1% management fee and 10% incentive fee. Additionally, the performance calculation assumes that all investors were given the same economic terms with respect to their investment. From Inception (May 1, 2022) the performance of the PEP TE&M Opportunities Fund is calculated pro forma to represent the highest fee level offered for the strategy. The performance calculation assumes that the investor’s account participated fully, on an applicable pro forma basis, in all investments, and was assessed a 1.5% management fee and 20% incentive fee subject to high water mark. Additionally, the performance calculation assumes that all investors were given the same economic terms with respect to their investment. Individual investors’ returns will vary from the strategy returns due to the timing of subscriptions and redemptions. Indexes are unmanaged and have no fees or expenses. An investment cannot be made directly in an index. The strategies represented consist of securities which may vary significantly from those in the indices listed in the Estimated Net Performance Benchmark chart, and performance calculation methods may not be entirely comparable. Accordingly, comparing results shown to those of the aforementioned indices may be of limited use. Please refer to fund documents for terms and appropriate risk disclosures. As a reminder, please note that the information provided is confidential and should not be forwarded or distributed by any recipient. If you would like to add someone to the distribution list or have any questions, please feel free to contact us at ClientServices@PickeringEnergyPartners.com.
