Energy Prospectus

One of our long-time members in an economist living in Brazil. He sent me the notes below. My comments are in blue.
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Classical Insights bullet points … April 30, 2025
Key Liberation Day mysteries are on the road to resolution:

1) The spike in the 10y yield to 4.56% during the week of April 7 was at least partly an attack by Europe/Canada meant to destabilize the US bond market. It failed, and once you sell your bonds you can’t sell them again. Now the 10y yield and the US fed fund futures are both a) declining and b) getting back in sync with each other. This is good in the sense that the health of the US bond market is re-affirmed (though it also signals a slowing economy);

2) The tariff push by the Trump administration is really a geopolitical undertaking: You can’t be a superpower if your supply chains are under the control of your main competitor. It is an existential matter to re-shore crucial supply chains. Trinkets and minor stuff are not so important. Even autos are borderline, hence the temporary exemption for auto-part imports.

3) The Trump administration probably gamed out tactics and determined the only way to make any real progress was shock and awe. Hence the seemingly absurd nature of Liberation Day details. < Super high tariffs are just a negotiating tool and to make the countries you are negotiating with fear that you might actually enforce them. 90% of the countries that Team Trump is negotiating with know that they must have access to the U.S. market to survive, including China.

4) Objectively the administration is doing the right thing – and doing the right thing ought to score you some points with investors. After all, how did the US get to be leader of the world in the first place? By making ruthless geopolitical moves over the course of 200+ years – some of which only revealed their wisdom years or decades after the fact.

5) Treasury secretary Scott Bessent just proposed immediate expensing of new capex related to reshoring of factories to the US. That’s a big deal. He also said the administration is considering cutting the corporate tax rate for US manufacturers to 15% from 21%. < If they actually do this in the "Big Beautiful Bill", the U.S. economy will boom, and the S&P 500 Index will go up 1,000 points. The 15% corporate income tax rate will bring many companies back to the U.S. AND IT WILL ACTUALLY INCREASE U.S. TAX REVENUES because it will increase taxable income and increase good paying jobs. People that don't have jobs do not pay income taxes.

6) Now it’s a matter of calculating the earnings damage from this trade re-alignment: How long it will last, how bad it will be? Will easier Fed policy offset some of it? How should those upcoming earnings be valued now? < How will the impact demand for oil & gas?

7) Liquidity measures are getting a little tighter in recent days, most obviously the 5-year CPI breakeven. We can interpret this as either bad (policy tightness) or good (declining fear of runaway CPI or dollar plunge). I think it’s both.

8) When thinking about the S&P 500, a few more things to consider are:

>> 82% of the top 100 names in the S&P 500 are largely inelastic to GDP growth;
>> 90% of trading volume is now a function of passive strategies – so it’s very possible the overall equity market will respond to bad news with a longer delay than might have been the case 10 years ago;
>> The Fed is far quicker to get going with QE than it was pre-2008 and pre-2020. It’s just very unlikely we’re going to have any kind of liquidity crisis during the restructuring of global trade.

I haven’t made any trades since this whole thing started. Europe and Japan have been good, oil E&Ps have been bad. < The EPG member that wrote this, manages several large equity funds.
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Bottomline: FEAR of the Tariff War is much worse than the impact it will have. The Republicans MUST pass the income tax bill and they know it. When it passes, the Tariff War will end quickly. If the bill does include lowering the corporate tax rate to 15% it will wipe out any damage done by the tariffs. Plus, it will crush the Democrat Party, and they will scream bloody murder, but the voters who actually work for a living will love it. The Democrats have no real plan how to deal with Trump. Hating Trump and blocking deportation of criminals is not a winning strategy.

Note today from HFI Research:

I firmly believe that everything we will see in the oil market in the coming months will rely solely on this simple thesis: forcing the inevitable.

In a commodity market facing demand uncertainty, the market will react first; in this case, price will force the inevitable: lower supplies.

It won't matter if global oil inventories are drawing or flat.

It won't matter if demand is resilient.

What will ultimately matter for the market to change its tune is if it observes supplies moving lower. And in this case, it will want to see concrete evidence that US crude oil production is moving lower.

This is why I believe that even if global oil inventories trend lower in the coming weeks/months (our view), oil prices will remain subdued in order to keep supplies low. The market is going to force the inevitable, and given that supplies are going to be suppressed lower, the eventual rebound will be that much more cataclysmic.

For readers who have paid close attention to our real-time US crude oil production reading, it should have been obvious to you that US shale was rolling over throughout 2024.

We've been hammering this point away for much of the past year, and EIA 914 today reaffirmed the low production estimate. With February production coming in at 13.159 million b/d versus January's 13.13 million b/d, the signs of exhaustion are becoming clear...
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NEWS FLASH: Today's EIA monthly 914 report shows that U.S. oil production has declined from 13,438,000 bpd in DEC24 to 13,159,000 bpd in FEB25. There is NO CHANCE of U.S. oil production getting back to the DEC24 level at the current active drilling rig count.