Wednesday, June 20, 2018

OPEC’s fake oil output increase

Well, ‘fake’ is not really the right word. But Donald made the word ‘fake’ fashionable; let’s use it. So Saudi Arabia claims to have close to 2 million per day in extra barrels ‘behind pipe’, other countries such as Russia may be able to add an aggregate of 1 to 1.5 million barrels per day. You must realize, those spigots cannot be turned open overnight. This is for mostly ‘marginal’ production not quite economic or in disrepair. U.S. shale production just like Canada’s Montney production is restricted due pipeline restraint and a lack of LNG processing capacity. The only place for slack, ironically, is that much hated Canadian heavy oil. But then economics are still too poor to start new projects and Notley compromised with the oil industry on a carbon output cap. Not that we are likely to be restrained by said cap in the immediate future.

This year alone, demand for oil is scheduled to increase by another 1.5 to 2 million barrels per day. Even if OPEC could get all that ‘excess’ production on line by year end (a lot to ask for), that ‘excess’ is gone a few months into 2019. Hence the ‘fake’ output increase. The Donald nearly begged OPEC to produce more so Americans don’t pay for gas $3 per gallon or more. It is easier to ask the Saudis than to admit to Canada with our ‘weak’ leadership needs to increase our heavy oil output. Especially with Line3 held up and Keystone is still not a fact. Thank the lord for ‘oil-by-rail’ but this time it may not be Canada that has to pay with a ‘discount’. NAFTA, here we come! We maybe Donald’s closest ‘friends’ not too long from now.  Canadians are after all ‘very, very nice people’. 😊

This maybe a bit too simple a picture but I think it is not that far from reality. $80 WTI probably is not as far off as many think.  Even one Middle East disturbance and you could see prices spikes to a $100. In the meantime, mergers such as Vermillion-Spartan or Baytex-Raging River will undoubtedly lead to improved corporate balance sheets. No wonder that I am so bullish on Calgary and its oil industry. We probably don’t even have to turn off oil-supply to B.C. for prices at their pumps to go through the roof. So, Horgan I wonder how long you and your hypocritic buddies will last. 
Well we all may dream a bit. But next year we may see how delusional the expectation is of replacing the combustion engine and the switch to E-vehicles. I don’t say the switch won’t come. But probably it will take a lot longer than most have been led to believe.  Remember how we dreamed of the hydrogen engine? Remember anyone? It looked so good on paper, but investors lost billions (I was one of them but I did not lose those billions all by myself 😊 – it was more in the tens of thousands for me but it still did hurt). TESLA, here we come.  Oh, Alberta don’t forget: ‘O Lord give us another oil boom. I promise this time I won’t piss it away”.  How many times have we said that? I can’t count that high.
We saw it in the 2008-2009 great recession, the most severe in nearly 100 years and the historically long bull market that we are still in. The oil & gas down turn is the most severe in my lifetime. So it is possible that the coming boom will last must longer than we can today dream of.
Currently we are close to peak oil or peak oil supply. We will need a lot healthier oil industry to break through that production level. With so much expertise gone that companies often don’t have staff experienced enough to know what they don’t know and experienced staff was driven into retirement, it may become a much more painful recovery than many suspect. Even worse, we may find out that the U.S. is not capable to drill enough wells to offset declining production (Oh… those oil-shale wells do decline, boy or boy do they ever). They will have to drill even more to increase supply. Similar in Canada’s Montney and how much land is left? Probably a lot less than many expect.

It is a big question as to whether we can even meet energy demand of the world with oil. Gas is not far behind and we will benefit from the LNG plant in Kitimat and scream for more. But temper your enthusiasm because the supply and demand game is much more complex than many of us suspect. I do not claim to know it all. Far from it, after being over 40 years in the oil patch there is still so much that I don’t know. If you think I am on the right track and want to invest in oil and gas, also hedge for risk and for me being wrong. Buy not more that 5% of your portfolio in a single stock. Don’t buy it all at once. Buy a couple of hundred shares in company A and see how it performs. If it does fine add some more until finally you max out at 5% of your portfolio. I suspect you have plenty of time. Do the same for companies B, C and whatever. Also invest in gas production. Invest in Canada and in the U.S. oil (and gas) patch.

In the end make sure that you are not overweight in oil & gas. In a booming market that happens easily and thus often rebalance your portfolio. Also, these commodities are very cyclical. Especially if you own real estate in an oil producing city or you work in the oil industry, do not go overweight! We just learned how devasting a drop in commodity pricing can be. That way when the unavoidable drop in pricing occurs you have already taken most of your profits and you are diversified away into safer investments (if there is such a thing).

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