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LNG Glut To Continue Into 2020s, IEA Says

Dan Dicker

Dan Dicker

Dan Dicker is a 25 year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline and heating oil…

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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. Related: Can Oil Prices Hit $60 In 2018?

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.

(Click to enlarge)

Related: Expect A Major Leap In U.S. Oil Exports

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

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.

By Dan Dicker

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Leave a comment
  • mkschro on September 24 2017 said:
    Dan, great article and thanks. Are we on the cusp of a real reversal in sentiment soon? Has shale oil spent their CAPEX but now finds that revenue projections don't appear to come close to servicing upcoming debt payments? Rising GORs, excessive depletion, even hints of gas expansion and steeping declines all suggest lower-than-forecasted revenues going forward. Chanos has gone public questioning the business model and is shorting shale players, and Harold Hamm is blaming EIA's "exaggerated" production forecasts as depressing WTI prices and hampering their recovery. Panic seems to be in the air, which makes one wonder what surprises will appear in shale's Q3 earnings announcements.
  • Kr55 on September 24 2017 said:
    GS has and always will talk up their book. And that doesn't necessarily mean they are saying what they personally believe is true either. They can get stranded in bad positions like anyone else and will blatantly lie to try to move markets to save themselves some of the damage.
  • Brandon on September 25 2017 said:
    2017 oil demand growth at 1.6 Mbpd, even though still underestimated IMHO, is a huge increase. That's the entire oil production of an OPEC country like Nigeria. And next year we can expect more or less the same amount if not more (just think about India demand growth alone!). These are the facts supply and to be compared against and the result is that market is heavily unbalanced. Demand is growing much faster than supply, as simple as that.
  • bill on September 25 2017 said:
    High oil prices only hurt middle class and the poor, they only help greedy people and those so far out of touch with the reality of working class people so as not to care about them, but only care about enriching themselves, I hope they collapse, and the people who profit from hurting others take a tumble ff the perch of elitism.
  • Disgruntled on September 25 2017 said:
    I agree with Brandon. They continue to revise demand numbers (sometimes a year or two later) and they are always up. Demand of 100 million barrels EACH DAY is just over the horizon.

    The only "blessing" from these low oil prices is that of increasing demand more quickly. We are seeing that play out. The thing about people using energy to improve their lives is that once they start, they don't stop. Back when gasoline was over $4/gallon I overheard a guy say: "I'm going to pay it because I'm not going to walk." The Chinese, and now more and more Indians, are realizing that same sentiment.

    Relief is under way.
  • Kr55 on September 25 2017 said:
    The oil industry is far more complex than you think bill. The collapse you would hope for would leave to a major shortage in energy products which would lead to a massive spike in prices. This would lead to a crashing of economies and people would see their retirement saves wiped out yet again. OPEC's goal with these cuts was to prevent such a spike from happening and to ensure more stable investment into the industry. They don't want to see a spike and crash either. The 6-12 months of higher prices is not worth years and year of more pain and struggle.

    Oil and other 1-time use products are also one of the biggest drivers of inflation that keep the money printing and the world economy growing.

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