The energy sector is in the spotlight due to Iran, AI, and California. Click here for top hedge fund plays

What we heard from energy stakeholders

Hello from Colorado. There, I had the opportunity to chat with the Chairman of the Federal Trade Commission for nearly an hour. While most of my conversation with Andrew Ferguson was about AI and Big Tech, we ventured a little into energy for Europe and its energy issues.

“Affliction” is the correct term. The continent has been under constant tension since the Nord Stream pipeline exploded in 2022.

My Take → It’s incredible that we have satellites that can see inside your car from thousands of miles up, but we still don’t know who carried out one of the greatest acts of industrial vandalism in history.

The European energy story is one we’ve been reporting on for the past four years at CNBC. We have highlighted how important US LNG sales are to Germany and other countries, and the real risk of ‘energy poverty’ in wealthy countries like the UK. To be brutally honest, Europe is not the only victim of pipeline vandalism. The continent has been plagued by a number of bizarre energy policy decisions, including the closure of zero-emission nuclear power plants and the shutdown of natural gas facilities.

Many rational energy activists are scratching their heads. Climate risks tend to be central to many of these policies, and it is somewhat ironic that the relatively mild weather of recent years has helped to ‘save’ Europe from an even more dire energy situation.

Europe’s weather luck may have run out this year, and a war with Iran will make matters worse. Here’s why:

It’s been a hot summer in most of Europe. Air conditioning is not widespread across the continent, at least not yet, but its use is increasing. This increases the need for power generation and reduces natural gas storage levels. Europe also obtains significant amounts of natural gas through cargo imports from the Middle East, the United States, and (rather ironically) Russia.

Key points: Europe has agreed to end all Russian LNG imports by next fall, and to phase them out starting this year. I don’t know how we’ll get to zero import records within 12 months, but that’s the plan. Europe is doing European things.

This data from Germany’s Federal Network Agency, which tracks energy and energy storage levels, tells a more than a little scary story. It is the current “percentage of storage level” of natural gas. The blue line is the amount of natural gas stored from October last year to September this year. The orange line is the same period one year ago, and the gray shaded area is the moving average. You don’t have to speak German to read this graph and know that the situation is not ideal. Natural gas storage levels are lower than last year and at the lower end of the moving average. With Germany’s cold winters and increased demand for electricity to heat homes and businesses, energy storage levels will drop rapidly. If that happens, Germany will have to cut back on gas usage next year or face further declines in gas storage.

European natural gas demand will be bullish for US exporters Cheniere (LNG) and Venture Global (VG). I say “looks” bullish because while there is no doubt that Europe wants to buy our LNG, market buzz suggests that many of those cargoes are heading to Asia instead. Currently, much of Qatar’s LNG production has ceased operations due to Iranian attacks, and Asian buyers are hoping to secure surplus production capacity held by the United States.

Diesel fuel prices continue to rise. AAA reports the national average at $5.47 per gallon. That’s higher than prices in many cities around the country, including a staggering $7 a gallon in parts of California. Nationally, diesel prices are nearing the nominal all-time high of $5.81 hit in June 2022. Piper Sandler noted that diesel and jet fuel inventories, which would normally be flat or start rising ahead of fall, fell by 500,000 barrels last week. The Iran conflict and Russia’s war against Ukraine are also contributing to higher diesel prices, as a significant portion of the world’s refining capacity is currently offline.

RBI → After adjusting for inflation, petrol and diesel were expensive in 2008.

When it comes to fuel costs, California has historically had some of the highest fuel prices in the United States. Much of this is due to exorbitant taxes. The state has the highest gas tax in the country, adding more than 70 cents to every gallon you put in your tank. Don’t hold your breath hoping that they will subside one day. It’s California after all.

Taxes aren’t the only cause of California’s rising gas prices. Lack of oil refining capacity is also a major reason. Already in short supply of fuel refining, the state lost two more large refineries last year. Imports are needed to meet demand. The main source of imported fuel has been ships…but if the three companies have their way, that could change within a few years. It may seem impossible if you know the state and its policies, but the Golden State may get a new pipeline. The project, called Western Gateway, comes courtesy of oil, gas, pipeline and refinery companies. Philips 66 (PSX)HF Sinclair (DINO) and Kinder Morgan (KMI). Once built, the pipeline will connect to existing lines around Los Angeles and parts of the Midwest. Here is the CNBC map of the project. It could also help neighboring Arizona, which oddly relies on California for much of its gasoline imports.

Those reading this article from outside the United States may not realize how big California and its fuel needs really are. There are over 30 million registered vehicles in the state. And while electric cars and trucks are on the rise, millions of Californians are forced to live further from work and drive longer distances in gas-powered vehicles.

If built, the Western Gateway could become a pipeline that would lower gas prices for millions of motorists. But like most things oil and gas-related in California, nothing is certain until it’s completed. In this case, it will be 2029 at most.

Thank you for reading,

brian

We’re now at the peak of the summer, meaning analyst calls for energy stocks are drying up faster than in parts of hotly contested Europe. But this is cool. Our team of CNBC pros helped us dig up data on the 15 energy stocks most held by large hedge funds. We know this from U.S. government filings. Please note that the application data is from the previous quarter and may have changed in the time since you retrieved the data.

So let’s dive in.

The energy stocks most commonly held by hedge funds are not household oil and gas names. Williams (WMB) is a pipeline player. We don’t know exactly why each fund acquired Williams, but we’ll speculate a little and say the company is aggressively advancing its AI and data center efforts by connecting natural gas directly to power sources.

Chevron was the second most-held energy stock last quarter. That’s not surprising, but the next few may be. Third on the list is another pipeline plan, large-scale energy transfer (ET). This is followed by Devon Energy (DVN), Antero Resources (AR), and Expand Energy (EXE).

Smaller names that stand out to me on hedge fund lists include Solaris Energy Infrastructure (SEI), ProPetro Holding Corp (PUMP), Golar LNG (GLNG), and BKV Corporation (BKV).

Some of these stocks are also ones that analysts see as having the most upside potential. Solaris is 65% below its $95.52 price target. The company builds power infrastructure solutions such as mobile power and other AI demands.

Propetro (PUMP), based in Midland, Texas, is also involved in power generation, along with large-scale hydraulic fracturing operations. The stock is 43% below the consensus price target.

Speaking of pipelines, a company that’s been in the news, and is also on the hedge fund list above, is Targa Resources (TRGP). A little-talked-about pipeline company announces a 20-year agreement with ExxonMobil (XOM). Targa will help Exxon continue construction in Texas’ Permian Basin, adding new land to the company’s holdings.

We spoke with Josh Young, chief investment officer at Bison Interest, about energy markets reaching record highs as global conflicts disrupt oil flows and reshape supply dynamics.

Nuclear stocks haven’t had a complete meltdown this quarter, but they haven’t been doing well. Let’s see if these low prices and valuations will lure buyers back.