Energy: the shortfall no price rally can fix

Most portfolios still treat energy investing as a trade. Buy the spike, sell the glut, wait for the next one. Emanuel Datt, chief investment officer at Datt Capital, argues that framing no longer describes what has happened to global supply.

“This is a structural deficit, not a cyclical one,” Datt says. “Oil and gas fields are depleting assets by nature. Every producing field loses output year after year without continuous reinvestment and for more than a decade, the capital required just to hold global production steady has been falling short.”

The difference matters for allocation. A cyclical shortage corrects itself: prices rise, capital returns, supply follows. A structural one takes years, because the missing money was never chasing new discoveries.

Where the capital went

“Years of ESG driven divestment, political pressure and regulatory challenges have starved traditional producers of the capital needed to keep pace with demand,” Datt says. “The crisis is not a lack of money to find new oil. It is a severe lack of investment to maintain existing production infrastructure.”

That is the part advisers miss. Maintenance capital keeps ageing fields flat, and deferring it never shows up in a headline reserve number. It shows up years later as decline rates nobody budgeted for.

Datt puts a policy failure alongside the capital one. Governments across the developed world discouraged fossil fuel investment before renewables matured enough to take the load, he says, leaving a system with less redundancy and less spare capacity than current demand requires. Electrification tied to artificial intelligence infrastructure only adds to the strain.

The buffer has worn thin

Global markets have handled supply shocks for decades with two buffers: spare capacity held by OPEC and its allies, and the strategic reserves of the United States, Japan and South Korea.

Datt argues both have weakened at once. “Strategic reserves have been drawn down toward floor levels in several countries, while OPEC+ spare capacity has shrunk as member nations struggle to hit their own production targets,” he says. “There is less of a buffer to account for the large supply disruptions, and the closure of the Strait of Hormuz from March 2026 laid that dynamic bare.”

Prices behaved accordingly. Oil spiked through March and April, then pulled back just as sharply while the physical picture barely changed. Brent traded near US$86 a barrel in early August, about 18 per cent above a month earlier and 28 per cent higher than a year ago.

What it costs an Australian household

Liquefied natural gas netback pricing to Asia effectively sets east coast gas prices, so Australian users pay a version of the Asian spot price whatever the local supply position. ACCC figures show the pressure.

Producer contracted prices for 2026 supply averaged $13.55 a gigajoule, up 4 per cent, and the regulator expects southern states to need extra gas every month from April to September, with a 16 petajoule shortfall in July alone.

Datt sees little relief. “Our local electricity costs are likely to stay firm regardless of near-term moves in international prices, compounded by government reluctance to approve new oil and gas developments at precisely the wrong moment,” he says.

For advisers, that shows up in the client’s cost of living and in the inflation assumption under every retirement projection.

Paper prices and physical barrels

The second mismatch Datt keeps returning to runs between futures markets and physical supply. Algorithmic trading reacts instantly to a headline out of Washington or OPEC, producing volatility with little link to what comes out of the ground.

“For investors with a long time horizon and the stomach for short-term swings, that disconnect is an opening,” he says. “When paper-market selling pushes prices below what physical fundamentals justify, patient capital can buy in at a discount to intrinsic value.”

“We view energy as the ultimate safe haven. Capital historically rushes into tangible, irreplaceable real-world assets when fiat systems face structural crises. Nothing runs the physical world like energy.”

He draws a parallel with the 1970s, when energy investing was one of the few strategies to beat inflation through an era of shocks and stagflation. The mechanism today is the same, he says: scarcity, sovereign debt pressure and currency debasement pushing capital towards tangible assets.

Energy investing: where the money goes, and what to ask about it

Datt Capital favours established producers with balance sheets strong enough to sustain dividends through volatility, rather than speculative explorers. Its current positions include New Hope Corporation, Yancoal and Whitehaven Coal.

“We believe seaborne thermal coal prices will climb materially in the second half of FY2027 as LNG shortages, driven by Qatar’s reduced market access, push European and Asian buyers to compete for scarce supply, with thermal coal stepping in as the substitution fuel of choice,” Datt says.

On upstream oil and gas, he screens for high fixed-cost producers whose earnings move sharply with price, disciplined capital allocation and a record of returning cash to shareholders. Services and equipment providers rank lower, because that work is commoditised.

Advisers should test the specifics rather than the thesis. Two of the three named holdings are thermal coal producers. That will not clear every client’s ESG screen, and it does not square with the description of those positions as midstream exposure.

The coal call rests on a forecast about Qatari supply and a timeline more than a year out. And a structural argument, by construction, says nothing about the next six months of price action.

The supply deficit will take a decade to correct, if the capital shows up at all. Portfolios built on the assumption that cheap energy returns on schedule are the ones carrying the risk.