Tuesday, April 19, 2016

Deja Vue All Over Again!

So we’re on the road again. Puerto Vallarta, time-share capital of Mexico. You’d wonder whether their business is severely affected by today’s global low growth environment? This is also the weekend of Doha, where the face saving meeting between Saudi Arabia and Russia takes place with the goal of ending the oil price war so foolishly started by the new Saudi Regime. Yes, I say a meeting between Saudi Arabia and Russia, did I forget the other OPEC run alongs, many of whom are teetering on the cliff of financial insolvency?  It is just a token meeting since the real issue is that world oil supply and demand are coming back in balance in the second half of this year regardless of what the meeting outcome will be.
World supply has temporary fallen. When everything is said and done, U.S.  production declines from 9.7 million to somewhere between 8 and 8.5 million barrels per day. Canada’s production has fallen off as well although it is more difficult to shut-down our heavy oil production – most of it is super low decline rather than the fast decline oil-shale plays. So many Canadian producers had to keep on going even if they lost money on every heavy oil barrel produced. New drilling of light oil production has stopped since December or so and the resulting production decline will be felt in a year or so. So did the Saudis hurt North American oil production?  Yes, but at what cost? Seems like they cut off their own OPEC nose to spite North America. This continent is now the largest oil producer in the world, then there are Russia and Saudis et al. The OPEC’s power of prescribing oil prices has been greatly reduced. They can create havoc like when starting a price war, but so could Canada and other producers in an oversupplied market. Well Canada couldn’t, it are market forces that control our output prices and volumes not the Canadian government.
In the meantime, our North American oil industry is much more nimble, because it is governed by capitalism rather than by nationalism and right now our cost efficiency has been greatly increased. Many weaker players have been slaughtered or are diminished while the survivors are positioned to take over and become much more powerful. Low cost producers like CNRL, Suncor, Whitecap, Raging River, Tourmaline Oil, Peyto, Crescent Point… do I go on?  Yes, I include the low cost gas producers because gas produced along with the shale oil and other horizontal well targeted oil has dramatically fallen. This may have been hidden by an unusual warm winter season, but just wait for a few hot summers and cold winters.

So, since my guess is just as good or bad as anyone else’s, count on $50-$55 dollar oil by year end and $4 dollar gas next winter. That sets the stage for a powerful recovery of oil and gas company balance sheets and their share prices. So it is time to start building your energy portfolio. Also, don’t forget the U.S. dollar – the strong dollar has hurt the profits of many U.S. blue-chip companies, remember that nearly 40-60% of their profits are from overseas and they have lost competitiveness because of the strong dollar. Remember Delta buying Bombardier planes rather than Boeing? You think the cheap Canadian dollar may have something to do with that? Or Toronto and Vancouver real estate?

The U.S. dollar may have peaked and as such commodity prices are going up. And it is not only energy companies that have become more efficient during these harsh times. What about gold and gold miners?  Or copper – Freeport McMoran yeah! So, yes we’re at the beginning of a new commodities bull market. Will it be as vigorous as other commodity bull markets? Maybe not, maybe the low global growth rate is driven by demographics and the Millennials are not yet ready to pick up the slack. Maybe the commodity industry has learned and controls its growth rather than going from boom to bust and back to boom. Well, maybe not… Look at Canada which all of sudden loves deficits again. Especially los federales (Mexican touch), Justin! like father like son.  Are high inflation and high interest just around the corner? Hmmm that would make gold even more attractive. Don't you think that all this negative-interest rate stimulus would also create a lot of asset inflation? My guess is yep, commodities are back again and hold on to your hats – and adjust your portfolio to Deja Vue all over again!

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