Sunday, December 3, 2017

Will we ever see $100 oil again?

The masses and gurus will probably say unequivocally: “NO”. Did you know that investment consensus is often wrong? Many admit right now world oil supply/demand is balanced.  Opec has expressed concerns in under-investment in oil and gas. Canada’s oil patch, although still growing in production because of past investment dollars will definitely see a slow down if not a decline. Yet Canada is one of the few areas along with the U.S. Permian Basin where production has truly increased.  Offsetting that are Venezuela, Nigeria, Iraq and Mexico, amongst others. 

Demand is growing at between 1.5 and 2 million barrels per year. Although many say that electric cars, sorry ev-cars, will take a big bite out of that (analysts now don't expect Ontario to meet its ev-car target of 5% of the vehicle fleet by 2020 - Toronto Star). You may have noticed that this year’s oil demand growth may be close to 1.7 million barrels per day. Opec states that in 2030 oil demand will be around 105 million barrels up from today’s 95 million barrels per day but if I would multiply 1.5 million barrel per day demand growth times 15 years, my math suggests 95+ 22.5 = 117.5 million barrels.  But then that is simplistic straight line extrapolation.  But the 1.7 million growth this year is accompanied with modest, and as the experts call it, synchronous GDP growth. What would happen if the millennium generation wakes up along with the Chinese and Indian middle class?
As you can see there is a lot of speculation going on based on today’s timid growth and the expectation of a successful conversion of technology into less energy consumption. Demographics not withstanding.
Here are some other considerations. Supplies in the Permian are limited, and decline rates are high. Oh... and in spite of all the bluster, the industry in the Permian hasn’t made its money back as of today let be if it is supposed to do more drilling. Oh… and the easy fruits probably have been already plucked.
All the electric cars still make a lot of CO2 full cycle.  I understand that some estimate that a Tesla car full cycle produces the same CO2 than a conventional gas combustion car over 8 years.  If true, I would like to ask, what about hybrids?  Would they maybe be a better solution in terms of CO2 emissions? 
If I add this all up, I wouldn’t be surprised if oil and gas consumption will be around for a long time and that the underinvestment could result in much higher prices than many expect. What would happen to the oil and gas industry when we hit $100.  It is easy to expect $60 to $70 oil in 2018; but what about 2019 or 2040?  Especially if Saudi Arabia or Russia destabilizes?

The future is not cast in stone. There is room for many black swans from all directions. With oil and gas stocks now being ignored, this is the time to start scooping them up. You will do very well at $60 to $70 oil but if it hits $80 or a $100, you will make out like a bandit.

What is the downside? Really, do you expect $30 oil soon? Yes, Canada falls behind because of the current political climate but that will change as well. Or... buy U.S. oil and gas! (that way I can buy dirt-cheap Canadian stuff) When the current pipeline issues are addressed, and/or Canadians realize that we are in the business of resources things will look brighter.  Right now, too many live in their Canadian Real Estate bubble. That will pass too.

I don’t tell you to back up the truck. But I suggest you hold, if you haven’t done so yet, about 10 to 15% of your portfolio in oil related Canadian stocks: Production companies; Oil and gas services and of course pipeline companies.  Don’t hold more than 1 or 2% of your portfolio in a single company. And… don’t forget that a significant portion of the TSX is in oil & gas as well as in other resources so if you own Canadian stock market indexes you may already own more oil and gas than you thought you did. 

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