musings from TIS - and NWX's place in context.This day's report notes that new discoveries of oil are at 60 year lows. Newport is sitting quite pretty IMO and if The Institutional Strategist Investors are right, this stock, already substanitally discount priced, is primed to move. Read on:
---------------------
OIL POLITICS/WILDFIRES AND A LACK OF NEW DISCOVERIES
Three oil related items crossed the desk this morning, two of which have near term impact on the price of oil. The wildfires in northern Canada have shut-in about one-half of the two million bpd production around Ft. McMurray, according to Reuters. Canadian officials are warning they could be fighting the fires for months. If that is the case, how people could work, let alone be housed in the oil producing area, is an open question.
In Saudi Arabia, long-time oil minister Al-Naimi no longer reigns at the top of OPEC, signaling further changes in the hierarchy of Saudi government. But will oil policy change? That seems unlikely to me. As Iranian production comes online and the contest between the two countries for influence in the Mideast grows more heated, I think it is defense policy, rather than oil policy which will rise to the top of the new Crown Prince’s agenda- along with the economy. Yes, the price of oil and oil revenues are a key component of both the broad economy and defense spending. But winning a price war with Iran, if sanctions relief comes through, is a low probability bet. More likely is a conflict, waged by proxies, designed to weaken the government in each country. To the extent the U.S. picks sides, that seems already to have occurred.
Finally, according to IHS, discovery of new oil reserves are at their lowest level in 60 years. Just 2.8 billion barrels of new oil/liquids were found last year, the lowest number since 1954. Many of those new reserves were found in deepwater, which take years to bring into production. There is a school of thought developing that oil prices could trade much higher later this year, as global cap-ex remains subdued and demand picks-up by another 1 million bpd. Long term, the lack of new supply is clearly bullish.
With Saudi Arabia able to ramp-up production by another 1- 2 million bpd and perhaps willing to do so to continue to put pressure on Iran, I think something needs to break on the supply side before prices can move above $45 and stay there
Fed Speak- The new head of the Minneapolis Fed (my hometown), is Neel Kashkari, who also ran the TARP program during the 2008-20098 crash. He spoke at a luncheon yesterday, which I had the privilege to attend. He appears to be a smart guy, even if he did move to Minneapolis in the middle of winter. Speaking on the challenges of central banking, I was struck by two things. One comment he made concerned how the Treasury, where he worked at the time, did not see the 2008 crash coming. Later, answering a question from the floor, he noted that the data the Fed was receiving could be better, but generally has improved a lot, and if I heard correctly, seems to be pretty good. Then in response to another question he went on another explanation of how risks cannot always be foreseen, giving the move in oil from $147 to $30 which was a major economic shock, but no one saw coming. I think the $147 to $30 move he described, having occurred over nine years, was a bit too long for even the Fed’s seers to divine, but the move from $100 to $30 should have been forecast. We did, calling for a move from just over $100 to the $40s in Q3, 2014.
At the end of his talk, he described how at the Minneapolis Fed there is a project underway which looks at some of the transformational steps which might have been taken in the aftermath of the 2008-2009 crash, but which were discarded. The timeline for completion and presentation is year-end 2016. What struck me was how there was not a single comment, that I heard, about governments role in causing the housing bust of 2007-2008. Forcing banks to lend to people who could not pay for their housing, and everyone knew it, was the genesis of the housing boom and the subsequent bust. Banks used the securitization markets to lay off that risk, a risk they were forced by law or regulation to take. Now banks are not total innocents in the 2007-2008 story, but the role of Federal Housing policy cannot be left out of any solutions or the cure may end being worse than the disease. In a recent paper released by several think tanks, this problem of the government’s role in housing is addressed, along with suggestions on what might be done to prevent another crash.
As to where this study at the Minneapolis Fed of what other steps might be taken to avoid another crash, I have two suggestions. First, hire a good technical analyst. The markets will tell you long before the numbers do, that trouble is brewing. And second, look at the root cause of the problem, rather than solely looking at how to best contain the damage.
Source: Bloomberg Data Bloomberg News 618034 Ltd., Paul Nesbitt