MigraineCall wrote: I see that nothing significant has changed as to where we are headed with the price of oil and the future of oil stocks.
The markets have volatility in their nature, where news and sentiment often plays a bigger role than reality.
Monday's abrupt drop was one of those times, and one should consider that these moments are perhaps a gift to increase positions, not run away. As I did mid last week, I added another 400k on this drop, and am now again at full margin. Why? I calculate the drop is overblown with a knee jerk overreaction to the downside, shaking out stops and sending weak hands to the exits. There have been big speculative positions at play, many have been washed out. Could it drop further? Yes, but at these levels, it gives me a strong buy signal, as it has done so many times recently. As I predicted at the bottom of the last drop, oil rebounded to around $115, which was a retracement of around 50% from the $130's to $95's. It retraced from there, and now, technically it is in no man's land, but fundamentals will tend to support a higher price bias rather than lower.
The numbers behind the reasons given that caused oil to fall $10 do not add up:
- China Covid lockdowns?: In reality only a temporary demand loss in China of about 600kbblpd of finished products. China is in the midst of a diesel and fuel shortage. When it is out of stock or very expensive at the pumps in many places, it causes unrest. One must question the motives behind the lockdowns beyond Covid. In reality, this loss of demand, is nearly the same amount of supply lost due to the CPC Kazakhstan oil port storm damage.
- Ukraine war potential peace progress?: The nature of the oil supply chain is so long, dropping sanctions and a return of Russial Urals won't take any affect until months from now, even June. I hope the killing stops to end the suffering, but even if the war ended right now, many sanctions on Russia have had the effect of being permanent. Russia is in a terminal state of oil production decline. The key to Russian production increases over the last years have been in brownfield areas that were messed up by the Soviets, requiring the technical assistance of Halliburton, Schlumberger, and others that have now left, and will not return, leaving them to fend for themselves on their own. Without funding for a $280 billion Arctic investment, current production rates will plummet over the next years as these brownfields reach the end of life and exhaustion. New organic investment in oil is very unlikely with the economic hardships the Russian population will soon be faced with. Oil and product shipments by water have been halved, the effect of their loss to the global energy supply which won't be felt by markets untill May. As Russian port land storage is minimal, it will lead to well shut ins, which have the potential to damage reservoir and restart in the future. Then there is the cost and energy required to rebuild Ukraine. As headlines of negotiations continue to drive markets up and down, the war premium in oil has largely been discounted and has come down now to more realistic levels. Any positive progress to stop this war and drops the price of oil further should be bought.
- OPEC+ Meeting March 31: Expect the usual 400kbpd allowed increase, although most members can't even meet that. A non event that the market is waiting for, and will be one step closer to exhastion of OPEC+ spare capacity. A production increase announcement of more than 400k, and failure to meet it might even bring that harsh truth to the market sooner, creating price panic.
So if that addresses the concerns of yesterday's price overreactions, here's the bullish case:
Once again, I draw attention to dropping oil and product inventories, globally, and also within the US. Inventories should be building at this time of year, and the drops are bound to accellerate. The US Brent spread has created a strong arbitrage, which draws both finished products and crude from the US into Europe. Normally, finished product flows from Europe to the US. Crude inventory reports by API and EIA would be in panic mode without being propped up by the movements of oil out of the Strategic Petroleum Reserve into the system as loans. Product demand has been making new daily records in gasoline, a reminder that demand destruction happens in OECD countries at a much higher threshold than others.
Our energy transition has been a failure to launch so far. The damage that ESG has done to the energy industry is becoming clear, and the subject of many reports lately. There is increased focus on investment in the traditional energy sector, along with renewed interest. Input costs for all the components of renewables have surged as a result of higher oil prices, making costs more difficult to bear, and dragging back the timeline on implementation. Forecasts of shortages in the rare metals and materials needed don't help either.
Even if Iranian and Venezuelan oil returns to the market, it is minimal, and both are not in a position to ramp up production any time soon. Iranian cargos are on the water, waiting for sanctions release, but in the meantime many are already being delivered using ship to ship transfers to buyers without morals at substantial discounts.
Now, if all that isn't enough to paint a rosy energy picture, we still have the massive value dislocation of the shunned Canadian energy companies that are producing free cash flow at astonishing rates, trading at fractions of their true multiples. Every day that goes by with high oil prices, our companies get richer, and are one step closer to the day when they will realize their full value on the markets.
With average oil and product prices as high as they have been over the last 3 months, and merely 3 days left in the quarter, it is impossible for the 22Q1 of any producer to report anything other than a massive windfall of extra cash when earnings come out in just a few weeks. They have budgets based on oil being at half the price. Companies will scramble to decide what to do with the mountains of extra cash, and must decide on dividends, debt, share buybacks, aquisitions, or all of the above.
Owning oil stocks in this market is like landing a big fish. You hook a big one, then as you bring it close to the boat, it sees the net and goes for a dive. Do you cut the line and go try another spot? No. You give it some drag and tension, but let it run down and tire itself out, then reel it in slowly. Patience will be rewarded.
I know it is not at everyone's risk tolerance level, but for myself, using margin at 3:1 and reinvesting it has allowed my account to be up about 20x overall from 2 years ago, and it's path is parabolic. I do NOT want to miss this moment in time in particular, as the conditions are all lined up in place for a massive rise. I am maintaining a full leveraged exposure to energy as the world wakes up from the narrative they have been fed, starts to see the damage done due to poor energy policy, and comes to realize the full value of our precious energy resource production.
Accepting that there are occaisional gusts, until the telltales and windvane on the mast show me that the tradewind has shifted, I'll stay on course.
Bravo Migraine ! Great post at a time when it was needed and spoken with authenticity by someone who has a lot of skin in this game. As do I, 90% Canadian oil and up 5X overall since that horrible day March 19,2020 when I owned half Air Canada and half Canadian oil. Brutal destruction. Sold the wreckage from my AC position and put it on more Canadian oil. Thankfully.