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That's why the commodity sector is a very boom/bust type of business compared to many other sectors. It also serves as a signal for consumers to use those commodities liberally, or to tighten up their consumption habits. Price serves as a signal and incentive for producers to come out with new capex and supply, or to curtail capex and supply. Eventually, demand outpaces supply and causes an imbalance, rocketing up the prices. When commodity prices are low for a while, few entities want to invest capital into the space to find and produce more supply.

This tendency, combined with cyclical demand, eventually results in a period of oversupply, which leads prices to crash. When commodity prices are high, whether it's gold or oil or copper or something else, it attracts a ton of producers to spend money on exploration, development, and extraction of those relevant commodities. The well-known natural resource investor Rick Rule has a quote for the natural resources sector: 'Bear markets are the authors of bull markets, and bull markets are the authors of bear markets'.

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While this trend will have its ups and downs based on the economic cycle, there's a good case for a more structurally positive environment for free cash flows and shareholder returns going forward for the oil and gas industry this decade than has existed for a while. Now, as of this writing in late June, oil and gas companies in the US shale industry, and more broadly among publicly-traded independent oil companies, are on track to make record free cash flows in 2021: This lack of investment in the sector is setting up a probable shortage and structural bull market that could very well last longer than investors think, as we move into the years ahead.īack in mid-2020, folks were pronouncing the energy sector dead. The companies in the sector don't get rewarded by investors for reinvesting in growth anymore they get rewarded by strengthening their balance sheets, being disciplined with drilling, producing free cash flow, and returning a lot of that cash to shareholders.ĭue to this, I think there's a good case to hold high-quality oil and gas producers and transporters over the course of the 2020s decade, and/or to buy far-out 2024/2025 oil futures. Now, after a decade of financial losses in the sector along with rising ESG mandates to restrict capital to the sector, there isn't much funding for oil and gas companies or pipelines.

As a result, the sector's total returns have been abysmal:

Investors piled into the sector a decade ago, constantly providing funding to shale companies that destroyed capital with drilling activities that were not free cash flow positive, while oil majors made bad acquisitions at cycle highs and suffered major write-downs as well. The general consensus is that solar and wind technologies will take the oil and gas sector down over time, so there isn't much opportunity left. It's nothing more than a post-pandemic transitory bump in most people's minds. Some traders have played with it short-term due to the global reflationary rebound, but few investors are willing to commit to it long-term at this point. The oil and gas sector has been one of the most disliked and out-of-favor sectors among investors for a while now.

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