Energy Musings - December 1, 2025

The shale revolution has altered the nature of the oil industry's cycle and pricing dynamics. Many investors fail to understand the change. Energy has proven an excellent diversification investment.

The Paradoxes of Energy Investing

Energy investors are often a lonely bunch. Don’t they realize that their favorite industry has become a shell of its former dominant self? Why, back in the early 1970s, the Seven Sisters, the international oil industry’s largest companies, dictated pricing and controlled its flow to ensure their edicts occurred. Those were the good old days when energy stocks were the talk of the market, and profits were flowing.

The days of the Fossil Fuel Era are limited, according to climate activists, so energy investors need to put their money behind renewable energy companies. Of course, that hasn’t been a profitable move, as renewable energy companies are vulnerable to the termination of government subsidies. He who lives by the largess of politicians is at risk of dying when their supporters get outvoted.

Energy prices have become topical because of the dramatic growth in electricity demand driven by the buildout of data centers to support Artificial Intelligence algorithms. The question is how to guarantee 24/7 power when renewables perform at the whim of Mother Nature. Surprisingly, we are seeing a revival of nuclear power, once perceived as a sunset industry.

Today’s discussion of oil prices focuses on the growing inventory glut, as OPEC restores previously sidelined output to support prices and demand appears weaker than anticipated. Given the view that we are headed into a glut, the conventional oil price outlook is for significant downward pressure this winter and through next year.

The latest bearish oil price forecast was issued by JPMorgan, which called for $30 a barrel in 2026. Oil prices are being pressured by the reports of a deal to end the Ukraine-Russia war, which would include a loosening of sanctions on Russia’s oil industry. We also learned, with the ending of the U.S. government shutdown, that Commodity Futures Trading Commission data shows hedge funds holding a net short position for the first time in records dating back to 2007.

The wall of worry for oil prices and energy investors is growing. Are people being adversely affected by the news cycle and failing to think about the longer-term future?

Since the oil sector accounts for barely 3% of the Standard & Poor’s 500 Index, many investors may think the industry operates today much as it has for its 170-year history. As a commodity, the industry experiences cycles driven by shifts in oil supply and demand.

Until the turn of the century, the oil industry was primarily a long-cycle industry because the time from investing in new output to its arrival in the market was 7-10 years, and sometimes much longer depending on the remoteness of the new supply. That history has changed, but many investors appear ignorant of the shift.

In the final years of the 20^th century, North Dakota’s Bakken oil shale formation was tapped using horizontal drilling and advanced fracking technology, yielding higher output than conventional drilling. The success of the technology in the Bakken, combined with success in several natural gas formations, led to a broader effort to exploit our existing hydrocarbon basins. As oil shale drilling increased, U.S. oil output climbed steadily, reaching a record high.

The U.S. shale revolution has changed the global oil industry. Because of the higher cost of drilling and producing shale wells, this oil needs higher prices to be profitable. The best analogy for how the economics of the global oil industry have changed is the electricity industry. The most expensive electricity generation is the last power accepted into the grid. It is also the first power to be discontinued when demand declines.

That protocol operated during 2014-2017 when oil prices dropped. U.S. oil production declined by about one million barrels per day in response to the market’s price signals from peak to trough. Much of the oil decline came from reduced North Dakota output. A Bloomberg chart of U.S. oil production from a 2017 Recurrent Investment Advisors report showed the rise, fall, and recovery in U.S. oil production.

The first example of shale oil’s rapid response to oil price signals.

Recurrent was making the point that the nature of the oil industry was changing, which would have a substantial impact on the market’s future responsiveness. This shift came after decades of industry cycles ranging from 7 to 10 years.

The Recurrent report analyzed the oil industry’s capital spending-to-depreciation ratio as a proxy for industry profitability and the duration of industry cycles. They produced a chart showing the Texas Railroad Commission Era with the OPEC Era and speculation about the future in a shale-dominated market. The conclusion was that the cycles under the Texas Railroad Commission were shorter and had lower oil price volatility (the amplitude of price movements from highs to lows). To the contrary, the OPEC Era experienced longer cycles and higher oil price volatility. Recurrent speculated that the Shale Era would have shorter cycles and lower price amplitudes.

Oil industry cycle lessons from the Texas Railroad Commission era.

An updated report by Recurrent on oil industry cycles produced the following chart showing that the Shale Era has experienced shorter cycles and that oil prices have demonstrated lower volatility.

What a difference between the pre-shale and shale eras.

Here is Recurrent’s analysis of the respective eras.

An analysis of the OPEC era demonstrates a group working as a cartel. That means seeking agreements among a wide range of divergent countries with different populations, resource potential, economic structures, and geopolitical objectives. Instead of allocating members’ supplies based on oil costs, they are assigned based on quotas. Therefore, a lot of high-cost oil is injected into the market, which should be the first oil supply cut when demand fades. These market distortions have contributed to the long cycles of the pre-shale era.

Recurrent also calculated the volatility of oil prices. The results showed how much time the inflation-adjusted WTI spot price and the WTI 12-month futures price spent outside the $55-$85 per barrel range during the two periods marked by OPEC and shale dominance. The results are dramatic.

During the shale era, the WTI spot price was outside the designated price range slightly more than two-thirds of the time during the OPEC era. For WTI 12-month futures, the shale era was outside the range 17.5% of the time during the OPEC era. Shale has delivered shorter industry cycles and lower oil price volatility.

Shale has significantly reduced oil price volatility.

What Recurrent’s research demonstrates is that oil and gas investors should be careful in assuming that oil cycles will last more than a couple of years. Therefore, forecasts of low oil prices should also account for the timing of price rebounds as producers adjust their operations. This is not to suggest that the JPMorgan $30-a-barrel oil price prediction will not come to pass, but investors should consider the time horizon for a return to current price levels.

With that in mind, we were intrigued by Recurrent’s research on how energy investments can help diversify growth- and technology-focused portfolios that dominate the S&P 500 Index. This is not an endorsement of Recurrent or its investment funds, but what they showed about their investment performance against conventional wisdom was surprising.

Recurrent has two funds: Global Natural Resources and MLP (Master Limited Partnerships) and Infrastructure. The companies in these two portfolios come from various industry sectors, as shown in the following charts.

Recurrent portfolio compositions.

Investors concerned about the dominance of AI-related investments in the S&P 500’s performance this year are looking to diversify by investing in non-tech stocks. The problem is that many diversification strategies have historically offered poor long-term returns. Other diversification strategies have historically generated equity-like returns, but are highly correlated to the S&P 500, defeating the purpose of the investment strategy.

Recurrent showed that its two investment portfolios have offered meaningful diversification versus the S&P 500 while generating equity-like returns. The firm points out that this performance over the past 25 years has come despite “a massive commodity bust, Shale overspend, a multi-trillion-dollar attempt to rapidly transition to renewables and EVs, the shock of COVID, and trade wars.” The two sectors targeted by these funds “have offered uncorrelated returns, with total returns comparable to broad equity markets.”

The firm’s report started by showing the performance of many sector ETFs and indexes for the last four years. The chart is divided into four quarters, showing various investments and their returns and correlations with changes in the S&P 500. The public investment ETFs and indexes representing MLPs, Energy Infrastructure, and Natural Resources were in the upper-left quarter, showing low dependence on the S&P 500’s performance and still delivering high total returns.

Energy investments have delivered on their claims of diversification protection.

Source: Bloomberg, Recurrent research

Notes: MLPs = Alerian MLP Index; Energy Infra = Alerian Midstream Energy Index; Nat Res = S&P North American Natural Resources Sector Index; Growth = Russell 1000 Growth Index; Value = Russell 1000 Value Index; TIPS = Bloomberg TIPS Total Return Index; IG Bonds = Bloomberg Corporate Aggregate Index; HY Bonds = Bloomberg High Yield Agg Index. Inflation Multi-strat = S&P Multi-Asset Dynamic Inflation Response Index; Tech = S&P 500 Information Technology; REITs = S&P 500 Real Estate; Utilities = S&P 500 Utilities; International = MSCI World Ex-US; Liquid Alts = Wilshire Liquid Alts Index; Small Cap = Russell 2000. Returns are through 10/31/2025.

Expecting criticism from investors claiming that this four-year period benefited from the economic and energy rebound following the pandemic, Recurrent extended the analysis to the last decade.

Energy investments helped portfolios over the past decade.

While the results of the targeted sectors were not quite as strong as during the four years, they still provided equity-like returns with less correlation to the S&P 500. These returns were reasonable, given the commodity crash and COVID periods that dominated the decade. Once again, the diversification strategy of adding energy sector investments to a portfolio achieved what investors should desire.

Energy investments have been solid diversification alternatives.

For investors not satisfied with the four-year and decade-long analyses, Recurrent did a 25-year calculation. The analysis began on October 31, 2000, when NASDAQ was already down 35% following the bursting of the dot-com bubble. Energy prices were in a mid-cycle recovery from their 1990s lows. The point was that some of the pain from investing in technology stocks had already been felt, while part of the gain from the oil price recovery was also reflected in energy stocks.

Because the Energy Infrastructure index, used in the earlier charts, did not exist until 2006, Recurrent was forced to adjust. Furthermore, the Energy Infrastructure sector was predominantly MLP equities in the 1990s and 2000s. Therefore, it chose only to show the MLP Index in the 25-year graph. Once again, the MLP and Natural Resource sectors provided equity-like total returns, while not being overly dependent on the S&P 500. This shows that these sectors provided a solid portfolio diversification strategy against a tech-heavy stock market over an extended period.

What conclusions should one draw from these analyses? We would suggest that the changes in the energy industry brought by shale oil have made energy investment more pedestrian. Total returns include dividends, which have become more important to investors and are recognized by management as critical to the success of oil and gas companies. This focus and shortened industry cycles are changing how energy stocks should be viewed.

The recent International Energy Agency report on the need for increased oil and gas investment to sustain and grow production is a sign that this industry’s future will be better than conventional views, driven by the view that the transition to renewable energy will end fossil fuel use. Investors should determine whether they are short-term traders or true investors.

Instead of high-octane returns followed by painful losses, forcing investors to become market timers, the history of energy investments shows an industry with solid returns supported by conservative dividend strategies. Energy investments can help protect overall market returns while reducing volatility. Thank the shale revolution for this critical industry change.

(Again, we remind you that we are not offering investment advice or recommending Recurrent and its funds.)