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Dan Steffens

Dan Steffens

Dan Steffens is the President of Energy Prospectus Group (EPG), a networking organization based in Houston, Texas. He is a 1976 graduate of Tulsa University…

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Why Isn't Wall St. Backing The Next Shale Boom?

Only four of the companies in our Large-Cap Growth Portfolio are trading today in the upper half of their 52-week ranges: Concho Resources (CXO), Continental Resources (CLR), EOG Resources (EOG) and Diamondback Energy (FANG).

No doubt, these four companies are solid and have a lot of running room, but so are the other 12 companies.

Plus, all of the upstream oil & gas companies we follow are in much better shape today than they were a year ago. So, why is the Wall Street Gang not moving more money into these high quality upstream companies?

1. FEAR: This oil price cycle has been much worse and lasted much longer than previous cycles. Wall Street analysts are afraid to recommend upstream oil & gas companies when they fear an oil price pullback might come the next morning. I guess it is easier to recommend buying Bitcoin in your IRA even though no one on earth can explain the valuation.

2. There is not much confidence in OPEC + Russia sticking with their production quotas, despite the fact that they have actually been quite disciplined. In my opinion, OPEC + Russia must push up oil prices if they wish to survive. Even Saudi Arabia cannot survive Brent under $70 for more than a few more years. 2/3s of the OPEC nations are already bankrupt.

3. Wall Street still thinks the U.S. shale oil producers will ramp up production each time they can hedge oil over $50. Per EIA: U.S. crude oil production rose by 25,000 barrels per day (bpd) last week to 9.71 million barrels per day, bringing output close to levels of top producers Russia and Saudi Arabia. Early this year, the EIA predicted that U.S. oil production would top 10.0 million barrels per day by December 31st. Obviously that isn’t going to happen. My swag is that it will be difficult for the U.S. to get to and maintain production over 10.0 million barrels per day, unless oil prices go a lot higher. Global demand for oil will continue to go up by 1,500,000 barrels per day year-after-year and there is no way that the United States can keep up with the global rate of demand growth on its own.

4. Fear that electric vehicles will destroy demand for gasoline. My swag: Twenty years from now EVs will still be less than 10 percent of the vehicles on the road. Plus, no one knows where the battery materials are coming from even to make that happen. I am very bullish on a few lithium companies, especially Nemaska Lithium (NMKEF). I think the home market for power storage is much larger than the vehicle market. Related: Gas Shortage Has China Backtracking On Coal Ban

So, what will it take for Wall Street to wake up? Answer: a "Paradigm Shift"

A paradigm shift occurs when the under-lying assumptions that a person is basing their actions on are proven or perceived to be wrong. New assumptions cause a change in behavior.

Here is what I believe will cause a Paradigm Shift on Wall Street with regard to investing in upstream oil & gas companies:

1. Within six months, OECD oil in storage will dip below the 5-year average. There is already less than 30-days’ supply of oil in OECD storage, which is more important than the 5-year average.

2. Each year there is a big increase in demand for oil in the second quarter. 2018 will be no different than previous years. U.S. inventories of refined products are low today, so refinery utilization should remain high (93.8 percent per yesterday's EIA report, compared to 90.4 percent a year ago). Winter has arrived in the Northeast U.S. an area that still burns a lot of oil for space heating.

3. The technical pattern for oil confirms strong support level at $55. This morning WTI moved briefly below $56 and then moved higher. In my opinion, the higher lows on each pullback since June 21st (when WTI dipped to $42) are very bullish.

Hang tough: It only takes a few Wall Street firms recommending rotation into the energy sector and "The Herd" will follow.

By Dan Steffens for Oilprice.com

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Leave a comment
  • EdBCN on December 07 2017 said:
    The value of oil companies can be decimated by the perception that EVs are taking over long before they amount to a significant drag on consumption. Two years ago all the oil companies, EIA, and folks like Dan here were saying EVs wouldn't amount to anything more than a blip until well past 2050. Now folks like Dan are saying things like 10% of the market by 2037. In another two years the common wisdom will be that EVs will take the whole market by 2035. And then they'll actually end up achieving that by 2025. We've seen this movie before with photovoltaics.
  • Lee James on December 07 2017 said:
    Petroleum stocks are doing better these days ... but many economic sectors are doing better as well. It's not like you have to play the oil card.

    But why not invest in oil? "Oil always rebounds from the dips." That being said, the proverbial question, "are things different this time" still applies.

    Will techno-breakthroughs out pace growing difficulty of bringing in new oil supply? And, techno-breakthroughs are occuring, but at what cost?

    Major, integrated companies are shying away from the politics and long developmental time required of foreign supply. Domestically, where do we go after the Permian formation? And is there oil beyond 10-12k feet?

    In terms of our strategic well being, does it pay for the world to be dependent on oil, especially if oil revenue equips adversaries like Russia and Iran? Arms for Assad any one?

    Is it time to seriously move away from oil dependency, for a great many reasons?
  • Pimco on December 08 2017 said:
    I am curious "why rising demand is ignoring latest surge in oil prices?". It sounds quite normal what demand should slow down with prices being 25 or 30% higher. Am I missing something?
  • Billyjack on December 10 2017 said:
    Electrical vehicles will not be a concern to oil until Musk embezzles another $5 billion from the government to start installing hot rails on major thoroughfares that allow charging while driving.
  • Citizen oil on December 11 2017 said:
    I heard a top analyst say that 75% of the oil in gas sector is virtually non investable. Unless you are able to catch the bottom and sell at the top it is a dangerous and foolhardy "investment" As long as these idiotic companies continue to broadcast they want to grow 10, 15, 20% a year in a market that grows demand at 1-1.5% a year this commodity and industry is doomed. Cycle after cycle of boom and bust, they never learn.
  • Johan on December 13 2017 said:
    '...My swag: Twenty years from now EVs will still be less than 10 percent of the vehicles on the road. Plus, no one knows where the battery materials are coming from even to make that happen...' LOL! See Kodak. See Nokia. See horse carts about 100 years ago. About that. Nobody knew where the gasoline would come for petrol powered cars 100 years ago either. There were no gas stations and very few what we would call 'refineries' today. Oh. And there weren't any roads. Back then Dan would have obsessed about what these new-fangled horseless-buggies would be driven on. It's all about $/kwh for batteries. Follow it and see where it's been and the lights will go on.

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