Was Goldman Sachs Wrong About Oil Demand?

In my last two columns for Oilprice.com premium subscribers, I was first very clear in the opportunity I thought I saw coming in oil stocks. First, I outlined how oil companies had finally retreated from full-speed-ahead capex increases, looking to raise production into an oil environment that hadn’t been able to support it for the last two years. I also pointed out that this retrenchment had come in a unified way from oil companies, continuing their lemmings-like behavior of rather bad decision making during this entire oil bust.

The opportunity arose, I argued, because it seemed to me that the oil environment was finally, in fact, ready to improve – oil stockpiles were finally dropping below 5-year averages and declining steadily, and rig counts were due to decline as well, after so many months of sub-profitable oil prices.

All of this led me to believe that we were seeing a unique moment to get some quality oil stocks at value prices.

Two weeks ago, I further supported this thesis with the supposition that the Gulf Coast storms would actually accelerate these trends, going against virtually every other oil analyst out there, including an alert from Goldman Sachs claiming the storms would have a far greater impact on demand than supply.

It’s not turning out that way.

In the end, those alerts turned out to call the interim bottom in oil and oil stocks. We are starting to see acceleration in the very targeted Permian stocks I recommended weeks ago to take advantage of this opportunity. For example, favorite Cimarex Energy (XEC) has rallied from the low 90’s, when I began recommending oil stocks to trade $110 a share today. And I don’t think we’re done either.

I am alone – again - in believing that this recent revival of oil towards the top of this year-long range is much more likely to result in a breakout than in another retracement.

Why? Well, one reason can be found in the latest short-term energy report from the EIA. They are consistent in their belief that shale oil production in the U.S. is going to accelerate again in early 2018, again swelling stockpiles and creating a major glut, a projection I think will turn out to be woefully wrong. Reading closely in this latest report we see instead the fact of current declining production the EIA ascribes to Harvey. And while it’s true that the storm shut down some production in the Eagle Ford shale and the Gulf of Mexico, the pace of restarts in both places tells of a much more important long-term story – one that I have been delivering to you on a weekly basis.

I believe that the endless potential surpluses of oil from the Permian basin has been entirely overblown by the EIA and other oil analysts, and - as I shared with you in my exclusive report last week – we will never see the kind of production increases from shale that we have seen in the previous 5 years. The enormous ramping of production, first in the Bakken, then in the Eagle Ford and finally now in the Permian basin will never be repeated in my opinion – and that means that the oil opportunities are all staring us in the face and are ahead.

Finally, I give you this chart of crude stocks from the latest EIA report:

(Click to enlarge)

Do yourself a favor, and ignore this last uptick. In the end and as I said on Bloomberg TV, the result of the storms will hinder upstream production much more consistently going forward than downstream refining into gasoline and other products.

And that will be entirely bullish for the sector.