Investors with exposure to the energy market are facing cross currents between energy categories and between cyclical and sectoral waves. Just like stocks and then bonds, energy commodities are exhibiting a higher degree of volatility and it’s not just being driven by things like geopolitical headlines. In this week’s conference call (Market Call Update), I spoke about how it doesn’t have to just be a major event to shift market sentiment and direction, but a culmination of twists in the economic and policy landscape at the margin that add up to potentially a more significant market movement than what the ‘big’ headline would have suggested.

In the space of less than a month, we have seen crude oil prices swing from four-year lows to the highest levels since February in the wake of the Israel-Iran conflict. shifted from a generally accepted view that weakening global economic patterns and excess supply of crude oil would keep prices low, to a powder keg situation between Israel and Iran that would see Brent futures spike and culminate in a move above $80 as the U.S. bombed three of Iran’s nuclear facilities. Prices have since retraced back below $70 on Trump’s brokered ceasefire agreement between the two countries and Trump’s assurance that a nuclear agreement with Iran is coming. 

The problem is that the certainty expressed from the podium isn’t necessarily reflected in the data. Intelligence analysis after the U.S. attacks suggested that not only were the nuclear sites not “obliterated” as Trump stated, but a significant amount of fissile material may have taken the last train out so to speak. The pre-warned retaliatory strikes by Iran against U.S. bases were consistent with previous moves, but don’t argue against a less-telegraphed terror strike. Suffice to say, there remains the potential for crude oil to spike again in the coming weeks and months, but spike to where?

Some suggested after the Israel launched its assault on Iran that oil prices would skyrocket to $130 as the latter would likely opt to disrupt supply lines through the Strait of Hormuz, which sees roughly a fifth of the world’s crude shipments pass. They could have also gone after critical production and transportation facilities in Saudi Arabia. For now, they haven’t. Yet, there was a governor on how far prices could go because of the fact that the world is currently in an excess supply state.

Last week, the International Energy Agency (IEA) released its latest medium-term outlook and forecasts that global demand for oil will grow by 2.5 million barrels per day (mb/d) to a plateau of 105.5 mb/d by 2030.  Over the same period, global supply is expected to increase by over 5 mb/d to reach 114.7 mb/d by 2030. Interestingly, the IEA anticipates that with adoption of electric vehicles continuing to grow and putting a lid on gasoline and diesel fuel demand growth, the petrochemical industry will become the dominant source of oil demand growth over the remainder of this decade. The updated forecast does not take into account supply disruptions in the middle east or elsewhere, nor does it factor in policy-induced economic dislocations. The same person who has somehow brokered peace in the middle east has also created a tariff policy vortex that is stripping basis points off U.S. and global GDP growth estimates. Another way of putting it is that if the middle east was not on the brink, we could be looking at much lower prices for crude oil.

While volatile of late, natural gas prices have maintained their uptrend since 2024 as the world responds to the increased demand for electrical power generation from sources cleaner than coal. This has been driven by continued demand growth in electrification and the expansion in data centres to meet the appetite from artificial intelligence (AI). We have argued for some time now that natural gas dominant players in the energy patch would rise to the top in this electrification trend. Canada is finally taking this seriously, as are other countries, resulting in more dollars being spent on transportation (pipelines) and export-ready production (liquified natural gas, or LNG, plans).

A weakening in global economic activity due to tariffs, trade restrictions and other geopolitical shocks can be negative for natural gas, just like oil, as slower growth feeds through into demand. We still argue though that gas will benefit from the secular transition from coal towards electricity generation, which will mute the cyclical effect from weaker growth. That transition will also help to work down inventories, that are still high relative to their five-year average, and this will also be helped by the fact that we are again looking at another hot summer and increased demand for electricity.

The heat dome that gripped the eastern regions of Canada and the U.S. this week sent power prices soaring until temperatures broke. Given the fact that we still have an infrastructure deficit with respect to upgrading the grid, a repeat of this past week over the course of this summer will only add further pressure and keep electricity prices elevated. As I mentioned on my call this week, extreme heat also distorts the normal flow of electricity on transmission lines, causing all electronic devices to use more power, according to the CEO of Whisker Labs, a company that develops smart sensors to monitor power quality in homes. That’s because electricity travels in waves, and when wave patterns move away from are normal or ideal, then it can alter the power that flows into homes.  According to this company, the effect can be as much as a 20% increase in consumption. The above chart shows the U.S. CPI electricity index over the past ten years. Over this period, the index has risen by an average of 4.5% per year. While this is already ahead of the average overall CPI inflation rate, the average pace is close to 8% over the past four years.

To the extent the electricity prices continue to exhibit inflation that outpaces that for natural gas, utilities are going to see potentially wider spark spreads and profitability. This is one reason that utilities have performed as well as they have this year and that applies here as well. The TSX utilities sub-group sports the fourth best gain this year at 7.2%, behind materials, discretionaries and financials.

Meanwhile, uranium prices exited the bear market since the beginning of last year and are possibly embarking on another trend move higher as seen in 2021 and 2023. Since the pandemic there has been discussion around how the world would have to take its hands out of its pockets and wrap its arms around nuclear power generation if it hoped to achieve its climate goals.  Talk is now becoming action, as we saw this past week when NY Governor Hochul announced it would start construction on a new nuclear power plant in Upstate New York. Last year, Constellation Energy inked an agreement with Microsoft to restart the Three Mile Island nuclear power plant to supply the company with power for 20 years. This was followed up recently by an agreement with Meta for 1.121 giga watts of power from its Clinton plant.

From a portfolio perspective, the gyrations of recent weeks should not alter strategies based on secular trends.  Energy companies that are heavily tilted towards crude oil, even though we are seeing a shift to greater demand from petrochemicals, will likely not deliver the same returns from other segments of the market like natural gas and uranium, not to mention alternative energy sources like wind and solar. This is why we continue to favour companies with a larger percentage of revenues and EBDITA from gas, uranium producers and utilities that are poised to benefit from continued demand growth from AI. That doesn’t mean we can’t take advantage of short-term opportunities, like the kneejerk pullback in crude oil on the hopes that middle east tensions are done.

 On behalf of the Pyle Wealth Advisory team, have a wonderful Canada Day weekend.

Andrew Pyle