Energy Sector in Focus: Iran, AI, and California Drive Hedge Fund Strategies

What I'm hearing from energy insiders

Greetings from Colorado, where I had the opportunity to do a nearly hour-long chat with the Chair of the Federal Trade Commission. While most of the conversation with Andrew Ferguson was about A.I. and Big Tech, we did venture a little bit into energy vis-à-vis Europe and its energy woes.

'Woes' is the correct term. The continent has been in a constant state of nervousness since the Nord Stream pipeline was blown up in 2022.

My take →  It's incredible that we have satellites that can see into your car from thousands of miles high, but we still don't know who perpetrated one of the largest acts of industrial sabotage of all time. 

The European energy story is one we've been reporting on at CNBC over the last 4 years. We've highlighted how critical U.S. LNG sales are to Germany and other nations, as well as the real risk of 'energy poverty' in wealthy countries like the U.K. Let's be brutally honest: Europe is not just a victim of pipeline sabotage. The continent is being hammered by a number of odd energy policy decisions, from closing zero-emission nuclear plants or shutting down natural gas facilities.

Many rational energy actors are scratching their heads. Climate risk tends to be front and center for many of these policy moves, so it's somewhat ironic that relatively mild weather the last few years has helped 'save' Europe from an even more serious energy situation.

Europe's weather luck may have run out this year, and the war in Iran is going to make things worse. Here's why.

It's been a hot summer across much of Europe. Although air conditioning is not ubiquitous across the continent - at least not yet - its use is increasing. That's raising the need to make power, which is cutting into natural gas storage levels. Europe also gets a big chunk of natural gas from shipped-in imports from the Middle East, United States and - rather ironically - Russia.   

Key Point → Europe has agreed to end all imports of Russian LNG by the fall of next year, with a phase-out starting this year. It's not clear to me how you go from record imports to zero imports in twelve months, but that's the plan. Europe doing Europe things.

This data from Germany's Federal Network Agency - which tracks energy and energy storage levels - is as telling as it is a little scary. It's the 'percent of storage levels' for natural gas right now. The blue line is natural gas storage from October of last year through September of this year. The orange line is the same period one year ago, with the shaded grey area a rolling average. You don't have to speak German to read this chart and see that the situation is not ideal.  Natural gas storage levels are lower than last year and right at the bottom end of the rolling average. If Germany has a cold winter and power demand rises to heat homes and businesses, those storage levels will draw down quickly. If that happens, Germany will have to cut back on gas use or face increasingly low levels of gas storage heading into next year.

European demand for natural gas would seem bullish for U.S. exporters Cheniere (LNG) and Venture Global (VG). I say 'seem' bullish because while there's no doubt Europe would like to buy our LNG, market chatter suggests many of those cargos are heading to Asia instead. Much Qatari LNG is now off-line due to Iranian attacks, and Asian buyers will be eager to snap up any excess capacity the U.S. may have.

Diesel fuel prices continue to climb higher. AAA reports the national average at $5.47 per gallon. It's higher than that in many cities around America, including the eye-watering $7 dollars per gallon in parts of California. Nationally, diesel is closing in on its nominal record high of $5.81 set back in June 2022. Piper Sandler notes that diesel and jet fuel inventories fell by a half million barrels last week when they would normally start to stay flat or even higher ahead of the fall. The Iran conflict and Russia's war on Ukraine are also contributing to higher diesel prices as a chunk of global refining capacity is now offline.

RBI → Inflation adjusted, gasoline and diesel were higher back in 2008.  

Speaking of fuel costs, California historically has some of the highest fuel prices in America. Much of that is because of sky-high taxes. The state has the highest gasoline taxes in the country, adding over 70 cents for every gallon you put in the tank. Don't hold your breath hoping those ever go down. It is California, after all.

High gas prices in California aren't just because of taxes. Lack of oil refining capacity is another main reason. Already short on fuel refining, the state lost two other big refineries in the last year. Imports are needed to meet demand. Ships have been the main source of any imported fuel... but that may change in a few years if three companies get their way. If you know the state and its policies, it may seem impossible but the Golden State may get a new pipeline. The project - called Western Gateway - would come courtesy of oil, gas, pipeline and refining companies Phillips 66 (PSX), H.F. Sinclair (DINO) and Kinder Morgan (KMI). When built, the pipeline would connect with some already existing lines around Los Angeles and in parts of the Midwest. Here's our CNBC map of the project. It could also help neighbor Arizona, which, rather bizarrely, relies on California for much of its gasoline imports.

If you're reading this from outside the United States, you may not realize how big California and its fuel demand really are. The state is home to over 30 million registered vehicles. And while a growing number of those cars and trucks are electric, millions of Californians are driving their gasoline-powered vehicles longer distances because they are forced to live farther away from work.  

If built, the Western Gateway could be a pipeline to lower gasoline prices for millions of drivers. But, like with most things oil- or gas-related in California, nothing is certain until its finished. Which in this case will be 2029 at best. 

Thanks for reading,

Brian

It's peak summer, which means that analyst calls on energy stocks are drying up faster than parts of red-hot Europe. But this is cool. Our CNBC Pro team helped me dig up data on the 15 energy stocks most owned by giant hedge funds. We know this from filings to the U.S. government. Keep in mind the filing data is for the previous quarter and could have changed between then and when we get the data.

That said, let's dive in.

The most owned hedge fund energy stock is not a household oil and gas name. It's pipeline player Williams (WMB). While we can't know exactly why each fund has bought Williams, I'll speculate a bit and say that the company is aggressively pushing into A.I. and data center action by directly connecting natural gas to power sources.

Chevron is the 2nd most owned energy stock last quarter. That's not a surprise, but the next few may be. Third on the list is another pipeline play, the massive Energy Transfer (ET). That's followed by Devon Energy (DVN), Antero Resources (AR) and Expand Energy (EXE).

Some smaller names that stick out to me on the hedge fund list are Solaris Energy Infrastructure (SEI), ProPetro Holding Corp (PUMP), Golar LNG (GLNG) and BKV Corporation (BKV).

Some of these stocks also have the most upside seen by analysts. Solaris is a full 65% lower than its $95.52 target. The company builds out power infrastructure solutions, things like mobile electricity and other A.I. demands.

Midland, Texas-based ProPetro (PUMP) also is involved in power generation with a big fracking business to go along with it. It's 43% below its consensus price target.

Speaking of pipelines, a company in the news - and also on the hedge fund list above - is Targa Resources (TRGP). The little-talked-about pipeline player announcing a 20-year deal with ExxonMobil (XOM). Targa will help Exxon continue to build out in Texas' Permian Basin and it will add some new land to the company's holdings.

I spoke with Bison Interests CIO Josh Young about energy markets hitting record highs as global conflicts disrupt oil flows and reshape supply dynamics.

Nuclear stocks haven't had a full meltdown this quarter, but it's not been a good run.  Let's see if these lower prices - and valuations - bring back buyers.