Energy Opportunity Is Emerging Now
Stock quotes in this article: eog, chk, sdrl, slb, cam
After insane volatility in oil and oil stocks, a review of the macro scene in energy and a few specific stocks is in order, especially after this week’s carnage (and only partial recovery).
First, the macro. Oil and oil companies continue to follow the timetable of destruction, whose path began almost one year ago today. Of the five major inputs to the decline in oil that I outlined in my book, it is obvious that the Chinese GDP fantasy (and the yuan devaluation race) was the straw that broke oil’s back on Monday (as well as the major averages). I was rather certain that oil’s lows from the early spring would not be significantly broken, but the power of the Chinese disaster was enough to send it briefly down to $38 a barrel. But to be perfectly clear, this latest move did not signal a sell, nor upset my macro scenario for oil or oil stocks.
We have always maintained that oil’s bust would be a very long process, with no significant bull market reestablishing itself until at least the end of the first quarter in 2016. Production from OPEC sources is inelastic in that there are no incentives to impose tougher quotas. The Saudi plan is working in destroying U.S. production competition and hobbling Iran, and they won’t let up until there is quite a bit more blood in the form of bankrupted shale players and reduced projected supply from other OECD sources.
And the signs of that happening imminently are everywhere. Rigs, reduced by 1,000 since March, are as stripped down as they can be and show no immediate signs of increasing. Bakken production is finally leveling off and headed south. U.S. drilling leases for the Gulf of Mexico are at a 30-year low. No U.S. oil company has any interest in new projects in the newly opened Mexican oil market, and you can forget about Brazil. Without “majors” money, projects in Mozambique, Angola, Libya and Nigeria are fast drying up.
These are all signs of a coming supply disaster, even though we all know that their effects may not be felt until 2016 — and more likely really start hitting the fan more than a year from now. The International Energy Agency (IEA) still estimates a global demand of 96 million barrels a day of crude in 2017. With the collapsing capex budgets the entire oil world is operating under, those barrels simply won’t be there.