Oil Bull Market Of A Lifetime?
“Why are you all excited all of a sudden on shale? You know why, because you like to chit chat . . . you are an agent of disturbance,” he said, pointing a finger at his questioner. “Leave us alone and leave all these issues. We had enough of shale oil and talks of shale. Please talk about anything else.”
Thus pleaded (or commanded) the Saudi oil minister Ali Al-Naimi to reporters at a May 2013 meeting of the Organization of the Petroleum Exporting Countries (OPEC). With the benefit of hindsight, the minister would have been well served to pay greater heed to the uncomfortable topic. Amid a shale led-boom in U.S. supply growth that saw Department of Energy inventories (excluding the strategic petroleum reserve) jump to 535 million barrels in March of 2017 from 325 million barrels in September 2014, energy prices of course hit the fritz in mid-2014, with WTI crude briefly falling below $30 a barrel in February 2016 from $107 a barrel in June 2014.
History rhymed today, somewhat, as current Saudi oil minister Khalid Al Falih, speaking at a Davos panel with U.S. Energy Secretary Rick Perry, took issue with a suggestion in the International Energy Agency’s Oil Market Report that “explosive” shale production growth would spur oversupply and potentially curtail prices. “I was not disputing the amazing revolution of shale . . . [but] in the overall global supply demand picture it’s not going to wreck the train.”
It’s no breaking news that energy prices have been on a tear, amid broad strength in the commodity complex and a seemingly disintegrating greenback. The oil price bid has also been driven by decisive improvements to the fundamental picture, beyond the OPEC production cuts announced in November 2016 and extended last year (they are currently in effect through 2018). On Dec. 21, Rystad Energy announced that new oil and gas discoveries dropped to a record low in 2017, both in terms of the volume of discovered resources, and the resources per field discovered. Overall, the recent recovery in prices has coincided with a substantial easing of that inventory stockpiling seen through the 2014-16 selloff.
Natural resource investors and friends of Grant’s Leigh Goehring and Adam Rozencwajg believe we haven’t seen anything yet. In the fourth quarter 2017 letter for their investment firm Goehring and Rozencwajg Associates, LLC, the pair contend that the durability of the shale “revolution” has been widely overstated.
Although the development of the oil shales have been a technological marvel and have provided the U.S. with a surge of production, they represent just a drop in the bucket once you take into account the collapse of conventional oil discoveries and the surge in global oil demand.
As for their forecast for the oil market’s fundamental characteristics in 2018, the duo do not mince words:
Surging demand combined with the slowdown in shale production growth and the meager growth of oil supply outside of North America means that even if OPEC were to restore all of its November 2016 production cuts (1.2 mm b/d), the 2018 oil market will remain in deficit. It’s something that few investors appreciate.
Our research has made us more convinced than ever that oil has entered a huge bull market, and that oil-related investments represent the investment of [a] lifetime.
Grant’s, which produced a pair of bullish analyses on an array of energy related plays in 2017 (“Laddered oil play,” March 10 and “Viscous black yields,” July 14), continues to expect good things for investors in the energy patch. We do however, take careful note of what appears to be an overcrowded boat on the long side. According to the CFTC’s commitment of traders report, crude oil speculative net positioning rose to a record 708,000 net long contracts on Jan. 16, more than double its five year average. It’s the same story across the pond: The ICE Brent crude commitment of traders reached a net 585,000 contracts on Jan. 23, itself a record high and also more than two times its average position over the last five years.
No comments:
Post a Comment