It’s Always Darkest Before The Dawn

The trading environment is brutal, there's no denying it. Slowing Chinese growth and impending Fed rate hikes make playing the market a crap game, with wavering momentum and heart-stopping entry points.

In energy, the news only seems to get worse. Production here in the U.S. hasn't dropped one ounce since October of last year and is down only marginally, perhaps 300,000 barrels a day, since hitting its record highs in April. Permian production is actually growing a bit, despite National rig counts that have been slashed by over 1100. Another stockpile increase reported today of over 4 million barrels sent prices again towards $40 and oil stocks are going down with it - again.

On the geopolitical front, Syria has made headway against the rebels, giving Russia and Iran more credibility at the "peace" talks in Paris and further isolating Saudi Arabia. The Saudis clearly have only one weapon left at their disposal and it's a full-on oil price war to cripple the economies both of their rival Iranians and Russians. With sanctions about to come off, the Iranians will potentially add half a million barrels a day to global supply next year. Libyan on-again, off-again production will certainly rebound soon and the Russian Petro-state won't stop producing for a moment either.

And yet, through all of this, I say there is room - even compulsory need - to look for opportunities in the oil space.

The International Energy Agency says oil won't reach $80 before 2020, and could stay below $80 to 2040. I say the IEA is all wet. Their forecast called for oil to be averaging $110 a barrel now, if we only go back a few years on their fantastically adept prognostications. $50 oil for even two more years will bankrupt the majority of U.S. independents, not to mention the sovereign balance sheets of Mexico, Venezuela, Iran, Nigeria and Russia. Now, that might happen and a second global credit meltdown in response as well - but the result won't be $50 oil, or $1000 gold.

Here are the alternative long-term facts: Demand continues to increase, up close to 1 million barrels a day every year, as it has been growing since the 1960's despite current slow global economic growth. Production here in the U.S. is about to fall off a cliff, as overworked core areas start to dry up and deferred new wells stack up for lack of spending. Scott Sheffield, CEO of Pioneer Natural Resources (PXD) is convinced that the Permian is the only remaining core area left in the U.S. That's it, Scott? The Bakken is dry? The Eagle Ford? He's talking his position, as usual, but he also correctly sees a very real trend forming. Next year will see a 1 million barrel a day drop in production, with another at least 1 million barrels a day coming out in 2017. That's already a 4 million barrel a day shift in supply/demand economics less than 20 months from now.

And OPEC? Are they made of money? Nah - Saudi Arabia has shown that their 11 million barrels a day is as much as they can reasonably pump. Iraq has no money or the stability to expand and no major oil company wants aggressive Iranian access, with their 'new' oil ministry going 'fee based' and refusing to share marketing profits.

And I haven't even touched upon the threats to Canadian oil sands with their local carbon sequestering tax and offshore future projects in Brazil, Australia and here in the Gulf of Mexico.

Short term, things look bleak - but long term, I can't imagine a more bullish scenario for those that have prepared to survive this bust.

Again, look for the short term drops in oil prices and associated stocks to increase holdings in oil producers with the best assets, cleaner balance sheets, minimal cash burn and staying power. I won't mention the names again; you've heard them from me too often now.

And remember, it's always darkest before the dawn.