Tuesday, February 27, 2018

Oil update March 2018. The coming oil boom...eh?

Figure 1. ZEO ETF by BMO for Canadian equal waited oil and gas stocks

Figure 2. XLE ETF for Spider U.S. oil and Gas companies

Figure 3  WTI prices over the last 10 years
Is the end near for Canada’s oil patch?  The pipeline issues and the environment lobby is a problem here more so than in the U.S. But sometimes it is worth do a step back. I have here three charts: BMO ETF of equal waited Canadian oil and gas companies; the Spider ETF for U.S. energy stocks and the third graph is the oil price.  All are displayed over the last 10 year.
I am just looking at the curve shapes. There is not that much difference between the U.S. and Canadian energy producer charts. From the 2014 eyeballed peak to today, the U.S. ETF is down 31% and the Canadian drop is 35%. Yes, in the last few months, Canadian oil and gas has underperformed but really, not by that much. Now the oil price in 2014 was around $100 (not as high as the $147 peak in 2007-2008). But the 2014 to today price drop is 37% (eyeballed). So, to mimic one Bank’s commercial: How much is noise and how much is real?  I think we’re dealing mostly with noise!
I am in good company. Eric Nuttal (Sprott’s oil & gas expert) was last year so disenchanted with Canada’s oil industry and our political climate, he only invested in U.S. oil and gas.  To be more specific he only invested in U.S, oil and gas service companies. Guess what, he is still coming home with a bloody nose like most of us energy investors. Yes, it is frustrating after all the pain in the oil patch, the lay-offs, the reduction in prices of oil and gas services such as drilling costs, all the cut backs and a thoroughly refinanced oil and gas industry. Many companies are now making some money even at very low prices and should do great at $63 per barrel. Guess what, their share prices are nearly as low as in January 2015 when oil was trading at $26 U.S.  So I think that oil and gas investors can buy assets at fire-sale prices. 
But don’t lose caution yet, because we are in the last stages of a stock bull market and there is a good chance we’re getting a market crash somewhere in the coming year or two. Oil and gas stocks will then likely suffer as well (although maybe less). So be careful how much you buy and buy only a little at a time. The real profits maybe made after that potential market crash. But that is not the point of this post.
I know, we still feel the pain in the oil patch everyday. Everything seems worrisome but yet the oil price has more than doubled since the lows and today it is trading at $63 U.S. Many companies are profitable today and yes heavy oil producers get right now paid in oil prices with a severe discount, but wasn’t that because some major U.S. pipelines were shut down because of some spills?  And is that not being addressed?  Of course it is. But yes, the pipeline capacity around the Montney play in Alberta’s Deep Basin and NE BC is experiencing major set backs. How could pipeline companies be so short sighted and not foresee the shortfall! But then why did the managements of the exploration companies not see this same capacity shortfall coming and yet they drilled their ‘brains out’! 
You do have to realize that during this oil price collapse many countries reduced production but in the U.S. production has increased and now some expect 11 million barrels per day.  But even more astounding is that with the combination of the Montney play and ongoing construction of oil sands projects, Canadian production has also increased!  Why do you think we can’t get it all in the pipelines?  It is not that they shut-down pipeline capacity.  Yes, some  pipelines are down for maintenance but we really have more production added than we could handle in terms of pipeline capacity and the railways are not exactly cooperating either.
A lot of these problems are typical for Canada’s oil patch and the U.S. is not that much different either. Think of lack of pipeline capacity in the Marcellus Shale just a couple of years ago. We always read about the sensational oil shale basins in Texas and how the Permian will out-produce the Middle East and Russia! But that is a lot of hype about a small portion of the U.S. oil industry. The rest is not doing so good. And yes, production in the U.S. from the absolute low during this price collapse is up by nearly one million barrels but world oil consumption is 95 million and on its way to 107 or even more millions of barrels per day. This added Canadian and U.S. production is just a drop in the total demand bucket. And what about the collapsing production in Venezuela or in Mexico? We know by now that those world oil production compilations, despite the ‘all-knowing’ faces of the analysts on tv, are just crude (pardon the pun) estimates.  Oil inventories show trends, but they are far from accurate numbers either. Thus, we’re just roughing it. In the past there were huge mistakes in oil and gas production accounting, I remember sudden disappearances of entire oil tanker fleets that stored perceived oil excesses not that long ago.
The advent of the electric car is greatly exaggerated. It will take some time; probably self-driving cars are first. I remember that we were within a couple of years of the hydrogen engine to become mainstream according to those who claimed to know. Where are these wonderful vehicles now?  And don’t forget if we replace our transportation fleet of combustible engines that use millions of barrels of oil, or better gasoline, where is the added electric energy coming from?  Don Quixote may think it are the evil windmills that will deliver, but I am pretty sure it will be natural gas!  Even if this huge electric conversion comes true you will still depend on a fossil fuel but possibly with less emissions.  With all those new lithium and cobalt mining projects, what will this booming industry do to the environment?  Do you really want this windmill farm in your backyard? A back yard filled with dead rotting corpses of birds?  I wonder how long it will the NIMBYs take to oppose that… eh Oops, that has already started!
I think, oil and gas are here to stay for years to come. The oil industry’s fundamentals are on the mend and stock markets with only eyes for FAANG stocks are hugely underestimating the value of many oil and gas stocks. All pundits declared that the cap on oil prices was $50 to $55 because of the increasing production from the Permian. Bollocks and now we are trading between $60 and $68 dollars per barrel, where are all those experts? My guess is that we will reach $70 somewhere this year. In an earlier post I speculated that even $100 oil would be possible within a decade. As usually nobody truly knows, certainly not me.
With the coming stock market crash, not a ‘if’ but a ‘when’, oil prices may fall back in ‘sympathy’ just like they did in 2008 and that may be the real buying opportunity. Yet… never lose caution because some (there are always some) predict that the next crash, because of all the debt problems and the uncertainties of fiat currencies, may be the grand mother of all and that stock markets will languish long after. As usual, who is to really say.  Protect yourself by diversifying not only in the industry segments your portfolio invests in; but also, diversify in other asset classes: gold bullion; real estate; cash, your career and/or your business. And when the stock markets reach ever higher highs during this boom consider hedging your portfolio by buying put options.  

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