It’s stunning how behind the times the analysts can be.
It is, in fact, the one thing to our advantage as independent investors – we care only about being right and less about not being wrong. When oil began dropping below $80 a barrel in early 2015, I admitted my mistake, abandoned my thoughts of a constantly bullish oil market, analyzed the real inputs that were causing the collapse, realigned my thinking for investing in the space and even wrote a book on the whole affair.
Meanwhile, oil companies were whistling through the graveyard – dropping capex projections while continuing to pump oil until the wells that were already on tap were producing at greater volumes than ever. “Keep Calm and Frack On” was the battle cry I heard at every conference in the early months of 2015, as I was telling readers that the time for investment in the oil space wasn’t going to reemerge for months and perhaps years. Oil companies laughed at the idea that oil prices would remain low, and assumed that the drop in oil prices couldn’t possibly last more than a quarter or two.
Now, everyone is starting to believe it – even to the point of ridiculousness. Two of the most influential analysts in the energy sector – both Goldman Sachs and OPEC itself are betting that oil prices that won’t reach $80 again for the next 5 years at least.
Again, this is where I push forward the reality check. Now the pendulum has begun to swing far too far in the opposite direction.
You could forgive both for their pessimism. It would be a far greater sin for either of them to advise oil clients, as is the case with Goldman, or oil producing countries, as is the case with OPEC, that prices are returning to solid profitability soon – be wrong on that prediction and you’ll destroy whole economies. It is far easier to be overwhelmingly pessimistic and be wrong – happily wrong in the case of either of these two powerhouses if oil goes over $100 sooner, as I believe it must.
The economics of oil simply do not support the production numbers that both of these analysts are using in their reports to predict forward supply. They look at current projections from oil companies and forget that consistently low oil prices will continue to require fast and drastic changes in budgets and new projects.
Look at Shell, for example – recently sinking billions in new exploratory drilling in the…