Monday, May 28, 2018

Buying energy producers at rock bottom prices

Oil production has now been balanced to undersupplied for close to a year. New Iranian oil sanctions and collapsing Venezuelan production will make this shortage even worse. It is this discrepancy that the new OPEC – Russia announcement tries to address.  It is not in Saudi’s interest with the upcoming sale of part of Saudi-Aramco to upset the applecart. Neither is it in Russia’s interest to sabotage the market psychology which now, nearly overwhelmingly, leans towards the under-supply model (you really wonder about the forward looking visions of the herd of oil and gas analysts or better the complete lack thereof). At the same time, in spite of the delusional e-vehicle crowd, world oil demand is strong and increasing by 1 to 1.5 million barrels per day each year. Within five years, using simple extrapolation, the world needs will approach 110 million barrels per day. Guess what, the entire oil-shale revolution increased U.S. production by around 5 to 6 million barrels per day and it took nearly 10 years to do so!  I will bet that the heavy oil producers, so looked down upon by many, will do fabulously over the coming decade – thank you very much!

Emerging economies are the main source of this increased energy demand and there is no solar, wind or even nuclear energy growth that can keep up with this.  Even if, and it is a BIG if, despite dreamy targets set by governments for e-vehicles, electricity replaces gasoline and diesel, the bulk of this electricity will have to be generated through natural gas and even coal. To think that the electric generation capacity growth from solar and wind can come even close to filling growing energy demand is just a pipedream. To top it off, the capital availability for oil and gas exploration is down big time and it will take years through discoveries to replace and increase oil and gas supply. The industry has and is losing expertise every day! The babyboomer geologists and engineers are retiring at an accelerating pace. Only die-hards like myself remain to transfer this knowledge to younger generations.  Guess what, right now the oil industry cannot even see forward far enough to recognize this looming shortage and need of skilled labor. That may take more time and even more losses of disillusioned expertise. Don’t forget, many babyboomer experts do not have to work well into their pension years. It is often their choice and love for the profession. When this expertise is treated so badly, just like many young new oil industry professionals, future supply of new oil and gas at affordable pricing is being lost and a lot of it is irreplaceable. 
Right now, oil and gas prices are going down by a short-term reaction to the OPEC-Russia announcement. Longer term, I am an oil and gas bull. The longer the true energy supply shortage is not recognized, the higher energy prices will spike. The beauty is that I don’t even have to work in the oil patch to benefit – I just buy a few shares at rock bottom prices. You can do the same.

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