This week in energy was dominated by the predictions from two top energy sources – OPEC and the International Energy Agency.
On the one side you had OPEC, which is meeting on November 30th to decide the fate of production guidelines going forward. It might be no surprise, in advance of that meeting that they would upgrade their view of the global demand picture and they did – seeing at least their share of demand increasing by more than 400,000 barrels a day. This prediction would bode very well for the Saudi/OPEC strategy of continued restrictions on production going forward.
On the opposite side was the IEA, whose World Energy Outlook reduced their forecast for oil demand to a ‘mere’ 1.5m barrels a day increase in 2018 – a number that’s already historically huge, but a reduction from a forecast they had in fact increased – two times already – in 2017. More impactful, perhaps, was their longer-term forecast of global energy use. Despite their robust call for a 30 percent increase in total energy demand to 2040, they somehow managed to discount the role that crude oil was likely to play in fulfilling that demand.
Whether I buy the IEA’s prognostication skills 20+ years into the future given their helpless track record or not – (I don’t) – the WEO was blamed for a sell-off in oil futures in the last week.
Let’s discount these reports for the moment. This sell-off was more likely a result of the huge influx of hedge fund and other speculative account long positions that had accumulated in the last weeks, a negative trend I spotted and pointed out in last week’s column.
The most important question to answer is of course: What now?
It has been my position during the last several months that oil is making its way towards a new bull market and the predictive analyses do nothing to alter that position. Indeed, the one fundamental piece of news that might slow down my enthusiasm for oil isn’t related either to the IEA’s WEO report nor the overeager buying of hedge funders – it is the unsettling increase of a net 9 rigs from the Baker-Hughes report of November 10th, including 7 fresh drilled from the Scoop/Stack. Whether this is a trend that will creep rigs upwards again – something I definitely wasn’t expecting through the end of the year – is something that bears watching for the next several weeks.
But until that trend is definitively upended, every dip must be viewed as a buying opportunity.
And here I invite you to look at some of the names that might have rocketed upwards and might have become too expensive to enter – now moderating slowly to more appetizing levels.
You know I am not your broker and will not deliver names you must buy and prices at which they must be bought. But I again will voice my preference for independent Permian shale names that have core acreage that’s proven to be profitable at $55 a barrel, with decent financials.
Many names will come to mind, including Pioneer Natural Resources (PXD), Concho Resources (CXO), Cimarex (XEC), EOG Resources (EOG) – and other smaller cap names like SM energy (SM) Centennial Resources (CDEV), Matador (MTDR) and Jagged Edge (JAG).
Until our thesis is broken, these are the places to look to take advantage of a market that I believe is just taking a small break from its inevitable upwards climb.
By Dan Dicker