…while the headlines flutter with speculation and policy drama, a more momentous shift has quietly taken hold: the great boom of U.S. shale – the engine that has defined a decade of oil dynamics – is now in unmistakable decline.
– Goehring & Rozencwajg Natural Resources Market Commentary; 1st Quarter 2025
Those investors who didn’t sell in May and go away were clearly prepared to “swoon in June.” “The Stock Market Has Roared Back to Record Highs” headlined Barrons. “Historic Rebound Sends S&P 500 to New Highs” seconded The Wall Street Journal. The months market had a feel to it like that of a grade school where the adults, the Trump administration’s talk of tariffs and taxing foreign capital flows, took the month off and it was back to the good old days of chasing AI stocks. Indeed, for all the talk in Q1 about the end of American “Exceptionalism,” Q2 bore a strong resemblance to the stock market of 2023 and 2024 with two of the S&P 500’s eleven sectors, Information Technology and Communication Services, contributing 8.7% of its 10.9% return for the quarter.
There have been three bull markets in the past one hundred years in commodity stocks, those companies that populate the Energy and Materials sectors of the S&P 500. Each lasted approximately ten years and followed periods of very high levels of stock market speculation. The first, from 1929 to 1940, followed “the Roaring 20’s” and doubled investors capital while the overall market declined 50%. The second, from 1968 to 1980, followed the frenzy of “The Nifty Fifty” and returned 500% for investors in those market sectors, twice that of the S&P 500. The third started in 1999 birthed in the collapse in NASDAQ, ran until the end of 2010 and created returns of 194.2% in XLE, the ETF tracking energy stocks and 75.3% in XLB, the ETF tracking materials stocks, dramatically outpacing the 2.3% return of the S&P 500. The market weighting of energy stocks in the S&P 500 nicely illustrates the “feast or famine” nature of the fortunes for that sector with their 34% share in 1980, 5% in 2000, 17% in 2008 and 3.4% currently.
Attitudes of investors towards the oil market are a good deal less than enthusiastic than perhaps they should be. While it is a fact that almost half of oil is used for gasoline and electric vehicles don’t use gasoline last year electric vehicle’s worldwide market share of all automobiles sold worldwide was 22% but hybrid vehicles, those employing both an electric battery as well as an internal combustion engine, are included in that share and are the most rapidly growing part of that market. Hybrids, while more efficient, are consumers of gasoline. In the U.S. the fully electric market share declined from 8.7% in Q4 2024 to 7.5% in Q1 2025. A second concern is slowing global economic growth rates, particularly that of China. True, China is slowing, but India, with a similarly sized population, consumes only one-third as much oil. Those looking for evidence of a decline in global oil consumption will be hard pressed to find it. From 2021 to 2025 global oil demand increased 8.7% versus its 6.4% rate of growth from 2015 to 2019.
The United States is the world’s largest oil producer with a share equaling that of Russia and Saudia Arabia, the world’s second and third largest producers, combined. In the last ten years, 90% of the increase in global production has come from this country and virtually all of it has come from the employment of fracking, a technology that has significantly expanded our source of supply. The issue here though is that fracking, while having significantly increased this country’s oil production, is now showing evidence of its future decline. The Permian Basin, a region approximately 175% that of the size of the state of Virginia, occupies much of the farthest western part of Texas and a modest share of the southwestern corner of New Mexico. Since 2019 the growth in the production levels of the Permian have been more than sufficient to offset the decline in the remainder of the United States. The growth in the Permian is poised to decline and when it does, the world may be faced with an oil market experiencing a growth in demand but a diminishing amount of supply.
50/50 portfolios returned 2 ½% for the month, 6.6% for the quarter and are now 9 ¼% positive for the year. Equities returned 4 ¼% in June with their quarter’s 9 ½% return cancelling the 1st quarter’s decline allowing them to now show a +6.9% for the year. Fixed Income returned 2.9% for both quarters and gold’s 30% ytd is the portfolio star.
Mark H. Tekamp