Oil Will Be The Place To Be In 2016 And 2017

After insane volatility in oil and oil stocks, a recap on the macro scene in energy and the few specific stocks need updating after this week's carnage (and only partial recovery).

First, to the macro: Oil and oil companies continue to follow the timetable of destruction whose path began almost exactly one year ago today. Of the five major inputs to the decline on oil that I outlined in my book leading to oil's continuing price collapse, it is obvious that the Chinese GDP fantasy (and also the Yuan devaluation race) was the straw that broke oil's back on Monday (as well as the major averages). I was rather certain that oil's lows of the early spring would not be significantly broken, but the power of the Chinese disaster was enough to send it briefly down to $38. To be instantly clear about this, this move did NOT signal a sell, nor upset my macro scenario in oil or oil stocks.

We have always maintained that oil's bust would be a very long process, with no significant bull market reestablishing itself until at least the end of 1Q 2016. Production from OPEC sources is inelastic in that there are no incentives to impose tougher quotas - the Saudi plan is working in destroying US production competition and hobbling Iran and they won't let up until there is quite a bit more blood on the streets in the form of bankrupted shale players and reduced projected supply from other OECD sources.

And the signs for that coming soon are everywhere. Rigs, down 1000 since March, are as stripped down as they can be and show no immediate sign of increasing. Bakken production is finally leveling off and headed south. US drilling leases for the Gulf of Mexico are at a 30-year low point. No US oil company has any interest in new projects in the newly opened Mexican oil market, and you can forget about Brazil. Without "majors'" money, projects in Mozambique, Angola, Libya and Nigeria are fast drying up. These are all signs of a coming supply disaster, even though we all know that their effects may not be felt even as soon as 2016 - and more likely to really start hitting the fan more than a year from now. The IEA still estimates a global demand of 96 million barrels a day of crude in 2017. With collapsing Capex budgets the entire oil world is operating under, those barrels simply won't be there. There is a generational opportunity emerging from this scenario, and it is emerging now. Oil will be the place to be in 2016 and 2017 for sure.

And now for the micro: Timing on playing this opportunity has proven not to be as easy, but to be fair, I expected that. Analysts are not traders and my role is to do both equally well. So far, I have not. It's almost impossible to pick bottoms, but I have been too enthusiastic to start positions and miss a value. In oil stocks, I have begun positions on three oil and gas companies in the last week - EOG Resources (EOG), Chesapeake (CHK) and Seadrill (SDRL). All are trading below where I bought them but need individual updating for those who are following me slavishly instead of finding oil ideas of their own.

EOG remains one of the three or four shale players that is not impacted by the 'Ponzi' setup of shale - they have literally decades of core shale acreage that will yield equal results to the ones they already operate. Very few others, perhaps no one else, is that deep. They eschew production for future planning, a move I heartily endorse but the analysts loathe. I bought at $75, again at $70 - and will wait for 2016 on this or for Exxon-Mobil (XOM) to make a bid on them, whichever comes first. No way I will sell this one, and will look for lower prices to buy more.

Chesapeake, as dreaded as their debt structure is, does not to me seem in immediate danger of bankruptcy - in fact, I don't see that as possible for the next 2 years at least. But it has been that fear that has driven shares well below my buy price of over $7.50 to touch $6. I'm still in, but I don't own this company at $14 or higher, and consequently I'm not out much yet - but at $5, if it gets there, I have to consider that there's something much worse in the financials at Chesapeake that someone knows that I don't, and I'll probably get out.

Finally, Seadrill is one that I've bought with an average closer to $10, and still believe in. If ever there was an indication that the world, as unhappy as it is right now with deepwater offshore drilling, must return to it with a vengeance, it is in the brilliant acquisition of Schlumberger (SLB) of Cameron International (CAM), by far the leading servicer of deepwater platforms. The disaster in deepwater stocks has struck Schlumberger as an opportunity to grab infrastructure on the cheap - and I couldn't agree more.

In short (which this column hasn't been), I'm suffering now, but confident in all three - and preparing to find other stocks in the energy sector to add to these.

We've kept our capital intact through 2015, ignoring energy shares - but the time to develop a long-term energy portfolio is now.