Top Trends for 2026: Energy capital bets on AI-led power demand, positions for cyclical oil surplus (Ep. 230)

All right welcome back to Energy Sense and S&P Global Energy Podcasts. I'll bring all topics on the intersection of energy and finance. This is your host, Hill Vaden, here with your other host, Sam Humphreys. Sam, how's it going? Good, thank you. Hill, how are you? Oh, you might have just heard my emails ping. Sorry about that. I didn't hear your emails ping, so your noise-transling headphones are doing a good job. I knew it. So, today we have spoken with Justin Jacobs as part of our kind of trend pieces that we try to cover a lot of these teams, S&P Global Teams, things to watch for in 2026. So this one is titled the Top 2026 Themes AI's Power Crunch, LNG Price Pressure and this Grammol for Critical Minerals. It's from our investing and energy team. And we cover a lot, but really some of the themes that fit well with Energy Sense because it's those topics that are supposed to be most meaningful to investors in energy. Can you give people a couple things to watch out for? Absolutely. So I don't think it would come as any surprise to anyone that the first thing we talk about is AI and the race for the power markets. I think the pressure that is on power markets, we've talked about this before on the podcast and Justin really does an excellent job of sort of painting the picture of what investment is going to look like this year and where the constraints are and the challenges are for those companies to get the power they need to meet the demand or the expected rise in power demand that we're anticipating for 2026. And again, unsurprisingly, we talk about gas and oil markets. We've had a few years of kind of under supply, but tighter supply, whereas this year we're sort of expecting a little bit more loosiness and know what that means for global prices. And again, just leaning on to sort of things to look out for is the role that governments might take in some of these companies, particularly in the US, for example, on how to sort of make things more secure for their countries. And I think I'm not going to spoil anything else, but what about you? You helped write this, so what about you? Yeah, I guess I did help, so not all of it was a surprise. But I think just the big thing for us, I think, looking at energy in 2026, there's so much opportunity that power is definitely a growth theme, and there's so much uncertainty. When one can invest in confidence where there's uncertainty, there's opportunities for value creation, opportunities for value destruction, and so the trick will be getting it right. So Justin does a good job on looking at those themes that guide our thoughts this year, and we can hand off to him now. Enjoy. All right, Justin, well thank you so much for joining us as part of the start of 2026 trend series as we look at the different top trends that our research teams at SMB Global have put out to start the year. This one is the top trends for investing in energy, or kind of that the capital is being deployed into global energy markets, and your report or the team report is top seven rather than top 10 or top 12 or whatever one happens to be. And we're recording here on January 20th, and looking at them, it looks like a number of these things have already either come true or in the process of coming true, so it's a pretty good hit rate. I don't think you had Indiana beating Miami for the national championship, but I'm not sure that counts. But the first one, maybe just to kind of open it up on kind of a big one, is the continuing kind of AI convergence with power and AI perhaps exerting more pressure on power markets in 2026, then we've recognized in 2025 or 2024. Can you talk a little bit about that and why that was number one? Yeah, thanks for having me, and I did not have Indiana winning on the rich ahead. Yeah, so I mean, obviously this AI trade, the AI story was the big story of 2025, and I think it's only going to become more important for power markets and for energy, kind of capital flows in 2026, and maybe just to kind of set the framework for what we see happening over the next year, kind of in a big picture way. Capital expenditures from hyper scalers, this is just the big publicly listed, Metas, Google and so on, is likely to top $400 billion this year, which is kind of incredible. That's 15% or so higher than the 2025. It's double what they were spending in 2024. And when you add on OpenAI and next AI and all these other companies, it's going to be quite a lot higher than that even. So if you put that in an energy context, our global upstream spending for this year is like $500 billion. A bit more than that. So it's just an enormous amount of money being put into this space. Our research group, 451, they expect about 14 gigawatts of new data center power capacity coming on this year. Again, just huge growth over the last couple of years. So all of this is just going to put all of the pressure we've seen on power markets over the last year, a couple of years, just kind of magnified. And that's going to keep happening at a bigger scale. I think what's really changing this year is that the hyper scalers and the technology firms are recognizing that power is just this enormous constraints on their growth. And it's going to become even more of a focus for them to try to ease those bottlenecks, to find ways through that and ways around that and ways to meet their growth targets while trying to find the power that they need. And it's going to be an enormous challenge for them and I think it's going to be a bigger story for energy markets again to share. So I guess one obvious question from that is there is a huge amount of power demands that those centers are requiring for this growth. Where are those companies looking to expand that power? How are they going to achieve that? Yeah, so I think there's a couple of ways. I think there's a couple of ways that we're focusing on that we're looking at. The first one is this big move that I think we're going to see towards behind the meter and that is kind of finding power to install on site at these huge data centers. And we've already seen that obviously. But I think it's just going to become more and more important as the kind of reality sets in on how difficult it's going to be to get power from the grid on the timeline that they're trying to move. Yeah, these data centers for the hyper scalers generate billions of dollars per year. So you know, waiting around for 12, 18 months for utility connection is an enormous opportunity to cost for these guys. So you know, finding power that you can install at your data center behind the meter. I think it's something you just can see more and more of. A lot of that's going to be these kind of small gas turbines where we've seen demand for these just kind of exploitive in the last last year, year and a half. A lot of batteries, I think will be installed. Batteries are important for these guys for one, the energy capacity, be able to kind of manage their energy flows. They're also very good at dealing with the kind of idiosyncratic way that AI training models, you know, kind of use power. It's very well as high batteries are can be very responsive to that. Solar, I think, feels to use some biometer solar probably less so than the natural gas, but that is going to be very important for these companies. And even I think, you know, more frontier technologies like fuel cells, I think we'll hear a lot more about this year because they are kind of ready to be deployed. Yeah, one of the other discussions is, you know, installing small nuclear reactors at data centers. I think we'll, obviously, still hear about that. And there's still be movement in that direction, but that's much further down the line in terms of reality. So behind the meter, I think, is one way where there's really kind of manifests where we hear a lot more about this. And the second one is kind of something that we've seen in the last few weeks even is the big tech companies investing more directly in power companies. So in the past, historically, they've been very large consumers of power and they've kind of used that power of the consumer to try to shape investments in technology developments and so on. Whereas I think more or less, more of them investing directly in power companies. So we saw at the end of last year, I think a couple days after we published this, Google acquired, well, partly acquired, acquired most of apparently. or company called Intersect for a little more than $4 billion. We've seen Amazon take a stake in an SMR developer. We saw OpenAI invest in a kind of energy and data center developer a couple of weeks ago. So I think you're going to see a lot more of that where the hyper scalers recognize the needs and sort of more directly acquire equipment, access to electrons, and expertise in the power sector in a way that they kind of had not done in the past. He'll I'm just going to jump in, sorry. Just to frame everything up for people listening. Are we talking about the US specifically in this report as well? Or is this the global picture that you're seeing? Because I know that there's we've we've, Hill and I've talked a lot about US data centers recently, but I just wanted to make sure that we are on the same page. Yeah, that's a great question. I think it is in terms of what we're talking about here is this mostly a US story. I think China has its own dynamics and Europe is I think coming, coming along, but it's not kind of happening anywhere near the same scale that was happening in the US. So you don't have this kind of almost frenzied atmosphere like you have in the US in other places. So I would say yes, it's it's going to be US focus for now. So frenzied atmosphere is a very carefully chosen description of what's happening in the US, given that this is an investor-focused document. The word bubble keeps popping up, no point intended, throughout the AI and power discussion. This is very fast growth. You mentioned some of the numbers in terms of how much capital is going into it. I would argue it's important that none of these hyper scalars are outspending cash flows in the way that some bubbles get defined or predicted. How should people think about bubble conversations as it relates to the AI boom and the power boom? I guess specifically in North America here on January 20th. Who knows what happens on January 21st? Yeah. So yes, the bubble conversation is going to continue to be very prominent, I think, just because you're seeing so much growth. I lean towards the, it's not a bubble in the sense that there's sort of an imminent popping coming in the next year or so. Largely because of what you mentioned, these are very, very big companies that are very strong balance sheets. They're very strong cash flows and they have other very profitable businesses for the most part. Obviously there are a company like OpenAI, there's a different situation than the company like Metta or Google around for that. So I think there is a lot of financial strength around this and I think those companies can draw on. That's very profitable businesses to fund this for the foreseeable future and the debt levels are not as high as you've seen in other financial bubbles in the past. That could change. They're taking on a lot of debt certainly. In another year or two, I think that's maybe a different conversation if we're on this trajectory. And in financial markets, it's interesting. You've seen some of the air being slowly released out of the AI trade in certain ways. You've seen the Mag 7 have cooled off quite a lot and some of the companies in particular have cooled off quite a lot. So the valuations are not incredibly high. So I think the bubble conversation is going to stick around and I think it's right to scrutinize this very closely. I personally don't see, I would say two things, but I don't see that kind of collapse in the offing in terms of equity markets. All that of course can always happen. But yeah, I don't see it happening. And a lot of what we're talking about in terms of the spending and the power growth certainly for this year and the next year is it's kind of already in the pipeline. So even if you did see that, there's just a lot of existing moments among the ground that I think is still going to kind of make what we're talking about kind of happening with the short-term. One of the next themes that you have written about in this paper are is LNG. Now again, Hill and I have had quite a lot of conversations about LNG over 2025. And I think this other year, I believe we're expecting to see kind of a way, a surge of new projects coming into the market. So can you explain what that is likely to do to global gas prices and where we see this year sort of going? Yeah, well, I'll say even just looking across kind of you and zooming out a little bit more across oil and gas markets, we see very comfortable supply across the board, which is going to make a lot of the prices pretty soft, I think this year, or dessert downward pressure on prices. On LNG, yeah, I mean, I think you have this incredible kind of wave of LNG supply coming on stream. A lot of this is kind of an echo or kind of downstream from what we saw after the Russia's invasion of Ukraine where we saw commodity prices really spike. That said, a big signal to the market to, yeah, if you have a project, that was the time to to fire it up. And kind of what we're seeing a couple of years down the line from that is these projects are starting up and there's a lot of them. And there's, yeah, just some credit of amount of supply coming. The US is really kind of the lead on this, on the LNG side, there's a huge amount of US LNG capacity coming out also from Canada, from West Africa as well. So, 2026, I think we see LNG supply up about 10% from 2025 and that's kind of that momentum is going to carry through to 2027 as well. So it's interesting, I mean, what the supply does to the market is it drives a little bit of a convergence between US and global gas markets, which is something that's been kind of talked about for many years, this kind of globalization of gas markets and this big surge in US supply is really kind of making that happen. So I think what we see is to a certain extent, a convergence of prices between the US and the world. So European Japanese gas prices, LNG prices falling below $10, which is historically pretty low and pretty comfortable for consumers. And the US, you have the demand from the data centers, you have demand from new LNG projects, you have fairly strong, low and up to the high, in the global context gas prices of $4 or $5. So it's a very interesting year for the global gas markets. It's, you know, when gas prices stay low, it kind of will create some issues in terms of suppliers, especially on the US sites and these new projects might struggle to find consumers in the way that maybe they were thinking a couple of years ago where demand was looking kind of insatiable. So as we're like a stain on gas for a minute, if we're looking at kind of the split world, if I am a North American gas producer, I should care more about LNG export opportunity than AI demand specifically. But more globally speaking and maybe inclusive of the US but certainly outside of the US, should we look at the global gas story and the power crunch or the power growth story as really being one of the same? I think they're two separate things happening at the same time. I guess this is hard to say. I mean, I think you're right. They will review us gas producer. LNG is the bigger kind of opportunity that just the scale of the US LNG export opportunity is much bigger than what we're seeing in terms of power demands on the US gas side. So I think that's where the focus is going to be more broadly from the US gas sector and the data center story is going to be a little bit more localized. If you're in the Marcellus, you all of a sudden have an opportunity to supply a nearby data center that has some onsite gas to a nearby, is that sort of thing? I think for the gas industry, the LNG story is going to be much bigger this year and beyond. So I'm going to do something that I said I wouldn't do the start of this. So fuel listening, he'll also write some of this report as well and he's laughing. You can't see this. But one of the key themes is the tail slowdown in the US. So he'll just, please do feel free to chime in. But can you explain what is going on in this space and where investment is likely to go this year? I, yeah, I'm going to turn it around on Justin. But yeah, I mean, I think one one of the things that we're seeing. and North America, Shailer, US Shailer, is a maturation of the resource, and the global oil and sugar global oil markets have really relied on Shailer growth to meet a lot of demand over the past several years, really, I guess, since 2008, 2010 when Shailer moved into commercial. And I think we were looking at the numbers today, Justin helped me out. The Permian is 50% of US supply or something like that. Yeah, I'm sure. Yeah. I'm sure. And as the Shailer sector has consolidated, each individual operator's growth plan has kind of merged into a smaller group of growth plans. And so our kind of thoughts here were that as the oil industry starts to look for growth and as the US Shailer sector starts to kind of max out its potential, you're going to have to start looking outside of the US to meet a longer term oil demand. But Justin, as we think about 2026, oil markets are very well supplied. And so I think part of that was that there's opportunity for people to perhaps build positions, but it would be unwise for people to put production, oil production into market. I guess can you jump in on the back of that? And maybe add some context around the Shailer sector story and talk about oil markets in 2026? Yeah. So maybe we'll start with oil markets, because this is a very interesting thing. But yeah, similarly to what we're talking about on the gas side and on the LNG side, you have just a very comfortable supply picture in the oil markets. US is still growing. You have new production from Brazil, new production from Guyana, OPEC has been increasing supply into the markets. And demand has been kind of OK, it's pretty good, but not great. So you have a really significant oversupply going into the first half of the year for sure and kind of extending towards the latter half as well. And we're talking well over a million barrels a day of oversupply in the first half of the year, which is, I think, we were seeing it over the last year and what we're seeing to start this year is an incredible amount of political instability due to political risk specifically affecting oil producing countries. So last year, we saw the US strike nuclear facilities in Iran. We had a huge amount of conflict between Israel and Iran. Obviously, what's happened in Venezuela over the last couple of weeks, few weeks with the US. I don't even know how to say it. Going in and extracting President Nicholas Maduro from Kyrokas. And obviously, they're kind of ongoing sanctions on Russia and Ukraine becoming much more willing and capable in terms of attacking Russian energy infrastructure. So this huge amount of risk around oil supplies and yet oil prices dropped from about $80 a barrel. To start of last year to about 60 hours at the end of the year and we're around there right now. And I would say, if anything, there's still downside price risk, just because of the oversupply. So the big question, when you have an oversupply like this, everybody leads back to OPEC and what does OPEC do. And I think that's going to be one of the key questions for the share in terms of oil markets and how prices react this year. But I think one of the key stories for us is that oil markets are oversupply. Prices are going to be soft. The market is not responding to geopolitical risk in the way that it historically has for this reason, just because there's this huge cushion in the market to deal with supply disruptions. And President Trump wants oil prices. It's about the only thing that he's been consistent on. Over the many years, he's been in politics. And he's been pretty clear that he wants to see prices in the '50s. And I think that's going to drive a lot of his decision making in some of these situations. So there's just a lot of downside on oil markets going into this year. If we want to tie it back to the shale story, the oil prices are pressuring US shale companies and supply. It's been surprising. Shale production has continued to grow. Our US production more broadly is continued to grow. Over the last year, I think much more slower than people expected. We see that kind of flattening out this year, maybe starting to decline towards the end of the year a little bit. But the industry has been very resilient as it has been many times in the past. Grandiates, as Hale says, it is not this kind of big engine of growth as it has been over the last decade for companies and for the oil market more broadly. So that really does change the kind of strategic approach for these companies and how they think about their futures dealing with commodity cycles plus decade down the road and how they grow. And I do think that they will start looking abroad again, which is something they-- it's interesting we had this period in the early 2010s when prices were high and everybody of-- and the Shale technology started to work very well in the US. And they were like, hey, maybe we can kind of apply this out to our own world. And I think one of these we learned from that is there's a lot of Shale resource scattered in places all over the world, the UK, in Poland, in Argentina, in Turkey. All these places kind of have Shale resource. Nobody's ever really been able to put all the puzzle pieces together in terms of putting together the company is to be able to do the operations, having the taxes and the owner's chaperites and all those things put together. So I think that's the challenge. I think people are going to start looking at that again very seriously. I hope there's anybody you're looking at, in particular, anywhere, particularly you're looking at. Well, I mean, the obvious one is Valkenbarta. And then you've seen some stuff in the Middle East as well in the UAE. I just think overall, kind of onshore. As you run out of one thing, you've got to start to look for other things. And Sam and I were on a call, I guess, last week or two weeks ago, talk about upstream. And interestingly, the fiscal terms in a lot of these host governments are getting more in favor of the operator, which perhaps opens up opportunity. Yeah. And also, I mean, we weren't thinking about this necessarily when we were writing this. But I really changed the conversation around things like Venezuela as well, where all of a sudden, a place like this opens up and the opportunity opens up. And if this had happened five, six years ago, most of these US companies would have been like, I mean, we have kind of everything we need in the US. We have a very long growth runway here. And we don't need to deal with this kind of what's going on in Venezuela. But I think now, there's a huge amount of oil in Venezuela. There's a lot of difficulties and challenges and so on. But we're going to look at it in a much more serious way now than I think they would have a few years ago when the US was growing at the rate it was growing at. So I think it has pretty profound effects in many ways across the world market. You're right there. Just looking at time, there's a few other themes that we haven't really touched on, which is solar and chemical minerals. But one thing Helen and I have asked people to-- because we do these lists every year. Obviously, you've got seven themes. What didn't make the cut? What did you want to include? Oh, well, I'll give you a choice. What did you want to include that you haven't? Or is there something else that you want us to look out for related to the themes that we've got? Yeah, maybe one that's in there that I think is important is governments, especially the US, and potentially Europe, as well, becoming much more interventionist in markets and in specific companies. So obviously, we've seen the Trump administration taking an America ink approach to the private sector and being very willing to invest directly into US companies. Take stakes in US companies that they see as national economic security where they see an economic or national security interest in doing so. And we've seen that on the energy, most energy relevance side is in the critical minerals. And I just think you're going to see a lot more of that. Because I think there's a sense that they're in this competition with China. This is kind of the way that China operates and you. sort of have to match that to be able to compete. So I just think we're going to see a lot more of that around critical minerals. And who knows, I mean, maybe even on the oil side or on the gas side or on the power side, if you know, if access to power and bringing power on stream very fast as soon as as a national security issue or an economic security issue. So I think that's something we're going to see a lot more. So just to follow up on that before we graph out, the high level or the increasing level of government involvement in minerals markets, metal and minerals, does that make it less investable to non-government investors? Does it add more uncertainty and more fragility to it and more opportunity to be on the wrong side of something? Well, for looking at it from my investing in US projects or projects in other places, it certainly introduces a lot more kind of unprecedented territory. But I think in a way it makes them more investable quite frankly because you have the backing of of the US government. One of the problems we've seen is that these projects just have not been able to compete with Chinese projects or Chinese companies. So they've been basically uninvestable to begin with. So they can't get less investable. They can only get more investment, I think. You are seeing some evidence in terms of capital flows coming into these projects and coming into these companies that points to the fact that they're becoming more investable. You see JB Morgan without a big kind of US strategic investment strategy at the end of last year. When they talked about investing in these kind of projects, so I think they become more investable. And you could see some real results around these. There are operational challenges and permitting issues around putting these facilities in the US, but there's clearly a big push to make them happen. All right. Well, I think we covered basically all of the list, maybe a couple, we kind of bet around the edges of some of them. And I think, I mean listeners will probably appreciate that a lot of these things have already kind of played out that it's only been 20 days and we've seen the AI alphabet deal. We've seen the meta nuclear deal. We've seen Valkomerative positions. We've seen oil markets and gas markets do, you know, respond to the oversupply. So we've got a lot of years or a lot of weeks ahead of us. Yeah. And they both just started. So plenty to keep our eyes on. But Justin, thank you. Thank you for joining us. Thanks for having me. And we look forward to doing this again next year.