Last week, I wanted to give you a firm go-ahead signal to target and buy oil stocks. This week, we’ve already done fine in following that advice. For now, I have little to add to the recommendation I made last week, except to note that in some cases, the reaction of oil stocks was relayed (I think prematurely) to some of the oil services stocks (shale specialist Helmerich and Payne, notably) – and that bears watching for our next important opportunity down the road.
With this very specific directive already out there and your work hopefully already done (or being done), what should I talk about this week? What I’d like to do, as we’re slowly reconstructing our portfolios that we will monitor and trade through the rest of the year, is give some background perspective to why I think we’ve embarked on a major move for oil and oil stocks that will prove worthy of waiting much of 2017 to finally materialize.
Recently, I heard a podcast interviewing Rusty Brazile, the director of RBN Energy, a top energy advisory service. Outside of the smart tangible trends that Brazile discussed, including the trends in the Permian with longer-spaced laterals and other efficiency gains, one of the strange (for me) conclusions that Brazile reached was the continued success he says he is witnessing. He claims to see more than marginal profitability in the Permian among more than a handful of E+P players. He would not even characterize the current environment as a bust – claiming that any slack that any OPEC production cut might generate – even a further 1m barrel a day cut – would be taken up by new drilling and production here in the U.S.
I couldn’t disagree more. Not only do I think that most oil production is ultimately unsustainable under $65 a barrel, I also have my doubts how much oil production here in the United States could ramp up much further, even with $100 a barrel oil. It’s important as investors for us to know the issues on both sides here. One speaks of potential oil production in the super-hot Permian and an oil market price stuck in neutral for years to come (Brazile) and the other of an impending supply shortage that will force prices above triple digits again (Me).
Luckily, I’ve already written up my background material for this argument: It’s one of the short essays of my upcoming report “5 Things You Don’t Know About Oil – But Should”,
For Oil Price premium subscribers, here is the secure link to read it – an exclusive first – Enjoy.
I hope you work through that piece closely enough to see where I am diverging from Rusty, and virtually most of the other oil analysts out there.
My major point is that – all of the efficiencies notwithstanding – and including all of the drilled wells on the sidelines waiting to go into service, that there is little evidence to believe that the incredible production increases we have seen here in U.S. shale plays in the past are in any way likely to continue in the future – in fact, we’re much more likely to have seen their peak already.
Sometimes, past performance is a great indicator of the future. At other times, it’s just history.
If I’m right, the timing of finding good energy investments will be key to long-term gains. And I think this is the moment when the real boom that follows the bust in oil prices, the boom that has followed every bust in oil prices before, is readying itself. That makes our opportunity in finding quality oil stocks to buy and put away for the long-haul all the more pressing.
For now, that’s the best advice I can give you.