⚡Getting Defensive

February 7, 2025

PRESENTED BY: ENERGY 101

If you read a lot of newsletters like I do, you may be noticing a certain theme. Namely, we’re all tired of writing about Executive Orders and tariffs.

So I sat down to write a tariff-free newsletter, and totally pulled it off.

Except that part about sanctions on Iran. Sanctions are different than tariffs.

~Doug​

What's in this issue:

• Energy Market Recap

• Defensive

• Headlines

ENERGY MARKETS

🛢️Oil prices declined by .59% as the inventory build and lack of tariffs (for now) were enough to offset Iran sanctions at this point.

Shadow Fleet, Part II

At this point, the Treasury Dept. has figured out that they way to slow oil sales is to go after the shipping fleet. So that’s what they’re doing.

According to the FT:

“new sanctions go further by targeting the network underpinning Iran’s oil sales, including tanker masters and companies providing crew to vessels transporting Iranian oil, including an Indian company that claims to have more than 100 vessels under management.”

WTI Spreads

Mar/Apr: +0.24
Mar/Dec: +3.25
Dec5/Dec6: +2.24

🔥Natural gas prices were higher yesterday by 1.43% as weather-related demand continues and inventories continue to decline.

The EIA number came in largely in line with expectations, showing a draw in inventories of 174 bcf. Inventories are now 208 bcf below where they were at this time last year.

PRESENTED BY ENERGY 101
How the Energy Industry Works

“ Although I’m not an engineer, the course gave me many useful tools to understand the technicalities of the industry. Now I can communicate easily with my contacts in the energy sector.

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DEFENSIVE

Utilities are known as defensive investments because of of the legal monopolies they enjoy and the fact that cutting the electricity bill is pretty much the worst way to save a few bucks.

However, as the chart of Edison International (owner of SoCal Edison) above shows, they aren’t free from risk. I was going to put an arrow on there, but I’ll let you just guess when the recent LA fires began.

As Edison Chief Executive Pedro Pizarro was quoted in the the WSJ:

“While we do not yet know what caused the Eaton wildfire, SCE [Southern California Edison] is exploring every possibility in its investigation, including the possibility that SCE’s equipment was involved,”

I’ll admit, shorting the local utility wasn’t my first thought when the fires broke out, but there is precedent for the trade. PG&E fell into bankruptcy after expenses and lawsuits from fires in 2019 began to pile up. It emerged from bankruptcy a year later.

Wildfire Fund

In the wake of PGE’s bankruptcy, California established a Wildfire Fund to help protect utilities against losses. After all, Warren Buffet has said that utilities in the west are no longer a safe investment.

However, S&P downgraded EIX on the risk that the $21 billion fund might not be enough if SCE is found to have contributed to the fires. Oof.

[EIX is only the 26th largest holding (1.65%) in the XLU Utilities ETF. So, you know, diversification. Largest holding, NextEra at 12.67%]

HEADLINES

“Pennsylvania-based Hershey said it booked a $460 million pretax gain last year from its commodity derivative positions”
+Surge in Cocoa Prices Shows Why Hershey Bets on Derivatives - WSJ
*Just to make a point, don’t like this headline. It’s called a hedge, not a bet.

“In a country as lucky and resource-rich as Australia, it would be a major policy failure if we are not able to achieve this.”
+Australia ‘losing on every front’ to Donald Trump’s US, warns Woodside chief -FT

“The pipeline has offered a way for Canadian oil producers to sell to international markets without relying on the U.S. network of pipelines. The pipeline currently accounts for 9% of Canada's total crude exports.”
+Trans Mountain says projects could expand pipeline capacity by 300,000 bpd - Reuters

ECONOMIC CALENDAR

Monday - PMI, ISM
Tuesday - Job Openings, Factory Orders, Fed Atlanta & San Fran speak,
Wednesday - ADP Employment, Crude Oil Storage Report
Thursday - Natural Gas Storage Report, Jobless Claims, Fed speakers
Friday - Employment