Drill, Baby… Maybe?

As 2026 begins, markets are digesting weak job growth, rising wage pressures, and growing uncertainty around energy policy. In this episode, Andrew Wilkinson is joined by Steve Sosnick and Jose Torres to unpack why oil companies are hesitating and why investors keep buying the dip despite the noise.

Summary – IBKR Podcasts Ep. 340

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson

Good morning. Welcome to this week’s podcast. It’s the first of the new year for us here at Interactive Brokers. Welcome back to the program, Steve Sosnick, chief Market Strategist, and Jose Torres, Senior Economist. Welcome guys. How are you?

Steve Sosnick

Doing great, Andrew. Good Doing well, Jose.

Jose Torres

Doing great, Steve. Doing great. Andrew. Great to be here.

Andrew Wilkinson

All right. Let’s kick off with Jose. We’ll start with the December jobs report Last Friday, 50,000 jobs were added in the final month of the year.  That marked the weakest average monthly employment growth in over two decades. What are your thoughts on the economy and the labor market at this point, Jose?

Jose Torres

Well, the labor market’s really being pulled down by the immigration restriction. The closed borders, we don’t have as much labor supply. We saw 45,000 folks leave the labor force in December.  That brought the labor force participation rate down to 62.4%, still way below the pre-pandemic peak of 63.5%, reflecting a heavy amount of retirements and a strict shrinking labor pool. As far as sector by sector, more sectors lost jobs than added. We saw seven sectors lose, six sectors add, and information was unchanged. The Unemployment Rate dipped to 4.4%. That was partially due to the labor force decline, which serves as the denominator in the unemployment rate calculation.

So, when you have a lower labor force, there’s downward pressure on the unemployment rate. Wage pressures were pretty strong. Average hourly earnings grew 3.8% year-over-year, above expectations. The consensus was expecting an unchanged 3.6%. The monthly came in, in line at 0.3%. Overall, Wall Street liked the report.

It was in line, slightly below expectation, so not too hot to take Fed rate cuts off the table, but also not cool enough to start to spark worries about an economic slowdown or the buoyancy of corporate earnings. Finally, the three major factors: rate sensitive sectors, small business, manufacturing, construction, continue to have trouble.

Of course, manufacturing lost jobs last year despite the administration’s goal of bolstering that sector. Then AI adoption is really weighing on the white-collar jobs. A lot of the entry level roles are being reduced. And then finally, you also have, of course, like I mentioned earlier, the immigration restriction hurting the supply of the more blue collar sectors and hampering the potential gains there.

Andrew Wilkinson

Steve, Jose just mentioned that the markets received the report very on Friday.  You’re a little less optimistic on the markets in the medium-term, aren’t you? What’s going on there?

Steve Sosnick

Well, I think right now we’re seeing an amount of interference in the markets in many ways that should bother people. But you know, as I’m talking to you now, the S&P 500 (SPX) is about unchanged at this point, just only slightly down.

I think, the combination of the assault on Fed independence, banks being told what they should be charging on credit cards, oil companies being told what they should be doing in a foreign country, et cetera, et cetera. I was actually just speaking to a friend of mine, a lifelong friend of mine from like elementary school, who wrote a book called Free Enterprise.  He’s a historian, and I said, “Is this among the most unprecedented assaults on free enterprise that we’ve seen?” And he had to agree that, we’re talking about stuff we haven’t seen in decades. And so, I do think that I understand the logic behind a lot of it. Yes, if people are paying less on credit cards, then things become more affordable. But I think it bothers me as someone who’s very much of a free market, Fed independence type of person, that we’re getting all this stuff chipping away at the margins, government investments in strategic companies and things of that nature. I want us to be free and unfettered.

I’m getting a little bit nervous that we’re moving away from that. And, while some of it might seem good intentioned in the short term, I think if you pile too much of it on a market it, it starts to really weigh on it.

Andrew Wilkinson

Steve would weigh in a little bit more on what’s actually happened over the weekend. The Justice Department is now investigating. It’s a criminal investigation against Jerome Powell over comments he made to a Senate hearing concerning the renovation of the Federal Reserve Building. What is going on and what does it all mean?

Steve Sosnick

What it means again, is, I think this the administration wants to be in charge of whatever it can be in charge of. And I think in some ways if that’s your mindset, it’s a bit nettlesome to have this very powerful lever on the economy that you don’t have direct control over. I think that’s to some extent where the Lisa Cook stuff started. I think it, in many ways it’s illogical from a timing point of view because by the time this thing works its way through Powell’s gone anyway for as Chair, by definition. But maybe this is to disincentivize him from staying on the board as Governor as he’s entitled to do until 2028. I think, again, this is more, in many ways, about showing who’s boss than it is about a constructive policy. And this is where my nerves come from, about my unease, because who knows what the case is here? As to the specific statements: a lot of these various prosecutions and investigations of this type have not succeeded. And so, is it throwing sand in the gears? Is it meant to just disincentivize independent thinking by the remaining people on the Fed?

It’s very hard to say. I don’t want to psychoanalyze, but I think from a market’s point of view, actually, it shows to me today how essentially buying the dip has become almost an involuntary reflex among investors.  Because if you pile up the news, you know about Fed independence and all the other stuff, we should be, we should at least be able to, maybe give back a little bit of even just Fridays gains. I’m not even talking about a sea change in sentiment. But this just shows you how resolute investors are.  It’ll be very interesting since some of this talk involves banks, and the banks begin reporting earnings later this week. It’ll be very interesting to hear what people like Jamie Dimon and Jane Fraser and some of the others have to say about this latest salvo on credit card rates.

Andrew Wilkinson

Jose excuse me, sticking with the same theme here, what implications does it have for the for President Trump’s nomination to the Federal Reserve chair for May. The two front runners are Kevin’ Warsh and Kevin Hassett. How are the odds looking on the event contract?

Jose Torres

Well still neck and neck, relatively speaking between Warsh and Hassett. However, we did see that Warsh’s odds dropped pretty sharply from 44% to 38%, so a 6% drop in light of President Trump probably wanting to choose a Fed outsider. Kevin Hassett never worked at the Fed, but Kevin Walsh is a former Fed Governor.

So, essentially seeing the Fed independence worries and the selection probabilities work their way into our prediction market.

Andrew Wilkinson

So, let’s turn our attention back to oil. Now, in the meeting at the White House on Friday, all the big CEOs and executives at the oil companies showed up. What do you make about Trump’s subsequent irritation with comments from the CEOs at ExxonMobil (XOM) and also ConocoPhillips (COP) looking for a kind of reparation from having had their investments seized by the Venezuelan government back in 2007 for a second time.

Jose Torres

The energy companies, they used to be market share focused. They used to be geared up to grow the amount of oil they were producing and all that, but they’ve really shifted into share buyback and dividend paying kind of companies that are looking to maximize profitability. So going into Venezuela for Exxon, a firm whose assets were seized not once, but twice, in the 2000’s when the Chavez revolution was gaining momentum. CEO Darren Woods is concerned that if they deploy capital, like I said earlier, a lot of their profits are being returned to shareholders via dividends and buybacks.

They’re concerned that if they go in there and make some heavy capital expenditures that they won’t get their returns. So, a big focus on commercial and legal frameworks over there. Also, the oil infrastructure has been destroyed over the years. It hasn’t been maintained. So, a lot of those funds are really given in some way to the political leaders, to the folks that were in power, close to power.

That’s really why the oil revenue for Venezuela and the barrels exported have shrunk roughly 70% from peak to trough, roughly 3 million barrel barrels per day at its peak to down to about 1 million barrels per day. Reflecting the fact that energy is a capital intensive industry, you can’t just take the money and go out and buy cars and aircraft and mansions and all that and think that the millions of barrels are going to keep being produced and the money’s going to keep flowing in. So that essentially has a huge cost now for the US companies to go in and to want to rebuild that against the backdrop of an uncertain landscape.  It’s going to take at least 18 to 24 months to get that back and running. President Trump isn’t in office in 2029. If it’s a Democrat, if it’s someone else, what if policy in Venezuela changes? As you can see, folks, ladies and gentlemen, there’s a lot of uncertainty on the horizon. That’s why some firms aren’t openly wanting to go to Venezuela to embark on energy infrastructure. However, Chevron (CVX) was already working there with the Maduro regime, so you know, they have more of an interest in wanting to stay and maybe wanting to expand there as well.

Andrew Wilkinson

Very good.

Steve Sosnick

Can I just throw in? My answer’s a lot more reductive. The cost of production in Venezuela, most optimistically is $62 a barrel. Right now, West Texas is in the high $50’s, and this is more expensive oil to refine. So right there, besides all the other challenges, it’s not necessarily a no brainer. Just because the president wants it done, doesn’t mean, for all the reasons Jose gave, that they’re looking to do it. Quite simply, it’s difficult to tell a major corporation that we want you to invest billions of dollars in something that on the face of it right now is actually unprofitable. And so, I think this goes back to my interference comments. Here are these are companies, these guys know what they’re doing. And early on in the administration, I had dinner with a friend of mine who’s in Oklahoma, and his comment about all this was like, “we’re not necessarily in love with this ‘drill, baby drill’ idea in Oklahoma, because if you drive the price of oil down too far that creates all these other stresses on a whole bunch of other domestic industries, including the oil companies.”

But then that has effects on, and he went into the example of the SNL crisis of the early ’80’s, which in many ways was triggered by a huge quick decline in the price of oil, but on companies that had been lending money based on much higher oil prices.  He wasn’t predicting that sort of thing to happen now, but while it’s understandable why lower oil prices are good for the majority of the country, it’s not necessarily what the oil companies want.  And so, to me that’s a pretty simple thing. If you’re asking me to do something that is unprofitable now, and as Jose mentions, is not necessarily profitable in the intermediate term, and it’s going to cost me billions of dollars for a very uncertain payout, I’m not rushing to do it?  I don’t care who’s asking.

Andrew Wilkinson

I think the official line at the White House is that crude oil prices should come down to about $50 soon.

Steve Sosnick

Yes. And that’s not what the oil companies really want to hear now. Again, it’s okay for the ones whose cost of production is the lowest, but actually the people with the lowest cost of production are in the Middle East. Certainly not Venezuela, and certainly, and not necessarily shale oil, and fracking, and fracked hydrocarbons in the US. So, this is one of these situations again where I think putting a thumb on the free markets has risks that I think we’re not necessarily appreciating right now.

Jose Torres

Yeah. And Steve, like you were saying about the credit card fees, if you bring the interest down at 10%, you know there’s going to be consequences there too. There won’t be as much accessibility. Not everyone’s going to get approved. Your reward programs aren’t going to be as buoyant. So absolutely when you start messing with the free market and then also with housing and all that stuff, there is always a consequence on the other side.

Steve Sosnick

One thing, by the way, and I know we don’t have time for this, but an interesting thing to me, by the way is there’s a lot of talk now about people agitating that the government’s issuing or trying to issue more in terms of short-term paper than long-term paper because that’s where the rates are. I’m going to point the listeners to the conversation that Jose and I had with current Fed governor Dr. Stephen Miran, where he criticized the Treasury for doing just that two years ago. So, politics does interesting things to interesting people.

Let me just leave it at that and we’ll put a link into that discussion we had into the comments below. [It’s here: US Treasury Becomes Activist Debt Issuer to Juice the Economy]

Andrew Wilkinson

Brilliant. Steve Sosnick and Jose, thank you both for joining me.

Steve Sosnick

Take care.

Andrew Wilkinson

All right, and to the audience, please remember to like and subscribe wherever you download your podcasts from, and we’ll speak to you soon. Bye for now.