The Energy Crisis No One's Talking About. Renewables Won't Cut It, Bet on Oil/Gas/Uranium

• Energy markets remain tight due to years of underinvestment. Governments continue pushing renewables despite the need for oil/gas investment.
• Oil prices have fallen but fundamentals point to a potentially difficult winter ahead. Spare capacity is low, OPEC is cutting production, and Russian oil sanctions loom.
• Natural gas prices have also dropped but Europe remains vulnerable this winter after filling storage by curtailing industry and burning coal/wood. Weather will be a key factor.
• Uranium stocks are flat this year but the industry is attracting more investor interest. New Western nuclear plants are still years away but demand from China/India provides near-term support.
• The path forward is likely increased investment in oil/gas, nuclear, and possibly coal, not unreliable renewables like wind/solar which have major efficiency issues.

Energy markets remain in focus for investors as tight supplies, reduced spare capacity and geopolitical tensions continue to support higher prices.

The Backdrop: Underinvestment and Policy Choices

The energy markets globally remain undersupplied after years of underinvestment, especially in oil and gas. Heavy investment in renewables has not been enough to offset declining fossil fuel capacity. Governments meanwhile continue prioritizing additional renewable investments over maintaining adequate oil and gas production capacity. This policy choice is worsening energy shortages rather than resolving them. Most administrations are "doubling down" on renewables despite clear evidence that more oil and gas investment is needed in the near term. The Russia-Ukraine conflict brought these underinvestment issues into sharper focus but was not itself the core driver. Investors have now been presented with an "unbelievable opportunity" to establish or add to energy positions. Current lower prices do not reflect improving fundamentals. Winter energy shortages remain a serious risk.

Oil and Gas: Demand vs Supply Factors

The oil markets are currently facing a clear supply-side shortage. Inventories remain worryingly low worldwide despite heavy SPR drawdowns from the US and others.

Meanwhile, spare OPEC capacity is minimal. The cartel has already agreed to cut 2 million barrels per day, beginning in October. At the same time, Russian oil sanctions start taking effect later this year. These tight conditions have not been fully priced in. While recession fears have weighed on demand projections, actual supply shortfalls will likely drive prices going forward.

In natural gas, the supply outlook may be more complicated but still concerning. Europe managed to fill gas storage ahead of winter by curtailing industrial gas use and burning more coal and wood. But Russian pipeline gas was also still flowing. With Russia now cutting flows, Europe remains vulnerable despite storage builds. Pipeline deliveries rather than storage meet winter demand spikes. Rationing of up to 40% could be needed if the coming winter is colder than average.

Overall, the broad energy markets remain in a precarious position. Renewables have not come close to filling the supply gap. Any demand recovery could quickly have prices spiking again.

Investment Opportunities

Within the oil and gas sector, high-quality US and Canadian independent producers will excel. These companies have been unfairly punished and provide deep value at current levels.

By contrast, the major integrated companies like Exxon and Chevron as less appealing targets. Their substantial profits may attract greater political scrutiny and interventions. Smaller independents can operate with lower visibility.

Uranium: Growing Interest but Production Lags

In uranium, mining stocks overall have seen volatile but flat performance in 2022 after very weak pricing in prior years. However, the uranium market is finally seeing renewed investor interest. Several factors are providing support. The Russia-Ukraine war has increased worries about relying on Russian uranium. China, India and even oil-rich Saudi Arabia have plans to build more nuclear reactors. Companion technologies like small modular reactors (SMRs) are also progressing. SMR development will start to have an impact on demand over the next 3-5 years, eg: TerraPower. Broadly, the uranium sector offers high upside potential as more investors recognize its merits.

However, meaningful new Western supply will take upwards of 10 years to come online given long development timelines. China provides the main demand catalyst for now. Prices would need to reach at least $95/lb for most new mines to be feasible.

In terms of investments, larger uranium producers are a safe investment but more advanced junior miners will start to become appealing, including Bannerman Energy, Global Atomic, NexGen Energy and Denison Mines. Their operations could become economical quicker if the uranium bull run continues.

Questionable Viability of Renewables

The outlook on renewables like wind and solar remains very negative. They are very energy-intensive, with a low energy return on capital and unlikely to resolve supply shortages.

For example, wind turbines require vast amounts of steel and concrete relative to energy output. Six 4.5MW turbines are needed to match one Permian Basin oil well. Their intermittent output also reduces usefulness without large-scale storage solutions. While carbon emissions are a concern, the climate solution rests with nuclear, not renewables. Modern nuclear reactors produce copious emissions-free power from very small fuel inputs.

Quite simply, wind and solar are only a small part of the solution". The emphasis needs to be on oil, gas, uranium and coal investments as opposed to renewable energy.

Coal and Natural Gas: Short Term Needs

Natural gas is preferable to coal from both efficiency and emissions perspectives if adequate supply can be secured. However, gas shortages in Europe have forced increased coal burning despite its higher carbon intensity. Potentially maintain some coal exposure as an inflation hedge and for its supply reliability until more gas and nuclear capacity can be built. But longer term, gas and nuclear will displace coal in power generation.

The Investment Thesis for Energy

Low valuations for oil/gas producers present a compelling opportunity

Uranium set to enter Bull Run as nuclear energy experiences renaissance

Avoid overpriced, inefficient renewable energy investments

Secure near-term exposure to coal due to European gas crisis

Investors should look to the deep value evident across oil, gas, uranium and coal equities today. Consider targeted investments and avoid overhyped renewables in what will be a volatile 1-24 months ahead in energy markets.