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Musings on the oil market and my oily stocks March 3, 2016

Posted by shaferfinancial in Finance.

Two years ago no one could predict what the last 20 months would look like in the oil market. But, the one thing that people could know if they looked is that the oil market is known for having mind numbing large movements that don’t conform to the fundamentals of oil production.

Given all that, and the impossibility of predicting oil prices going forward, it is apparent we have hit an inflection point. Brent price closed up to over $37 today. Interday movement was over 3% from its high to its low [all before noon]. That in itself tells us that emotions are ruling the movements.

Shale oil is now down over 500,000 BPD from its peak. Quarterly and year end financials indicate huge losses in the industry totaling billions of dollars for 2015. Bankruptcies are increasing. The majors are lowering capex significantly. The tight oil companies have reduced capex 80% or more in some cases. Some companies are even stopping their drilling programs. OPEC producers are talking freezing production in concert with Russia and other countries.

Demand is up. India over 10%, China right at 10% and the good old USA, gasoline usage is up 2% over last year.

Now all the analyst point out that storage is filling up here in the US. But that is a little confusing as this is about imports coming in bought by the refiners. Why would they go to all the expense of storing oil if they didn’t foresee the price going up in the near future?

Compare this to 6 months ago when tight oil was still being produced at peak rates, Saudi A. and Russia was trying to increase production, and everyone was predicting that demand would level off.

Now there is considerable damage that has been done to the oil industry. Billions lost. 100s of thousands of people laid off. Projects postponed and canceled. Reserves not being replaced. Countries budgets being diminished. Production in the North Sea, Mexico, Venezuela and Brazil are in real trouble. The first three have mature fields that are depleting and not being replaced. Brazil self imploded.

But there is a time when things change, and I believe we are there. Maybe the price of oil will continue to be lower than what it costs to produce it for a while longer???? But, we are IMO, looking an a inflection point.



1. Matt - March 10, 2016

So where should we look to invest then? What stocks are you looking at?

2. Matt - March 15, 2016

So Dave, what sector of the oil industry would you go aggressively in now?

shaferfinancial - March 15, 2016

If I had no oil investments, I would go into the majors, probably either Exon/Mobile or Total.
Still not convinced on shale oil companies, but EOG is the best of the breed and seems to have sensible management.
I think SeaDrill will survive and probably be in the 20s in a few years.
AWILCO is another one that will most likely survive and head up significantly in a couple of year.
SFL is a combo rig/shipping company that is very solid. It might be a buy at current prices now. Dividends keep going up even in this poor environment.

3. Greg - March 17, 2016

I once held a position in VNR when at $27/unit. When it rose to $30+, I sold, netting a tidy boost of 10%. That was just luck, because I wasn’t trying to time anything.

Fast forward to today, and VNR is trading at $2/unit. (Yes 2, not 20). BUT I actually had another vehicle (self directed Roth IRA wrapped inside an LLC), so I bought a big position AGAIN at $3.18/unit.

They have paused paying cash distributions, but I think eventually when the markets get past all this emotion and VNR keeps producing natural gas (85% of their output) and oil, things will rebound and I’ll net a positive cash value.

In the long run, I hope it recovers and I can eventually sell this position and instead buy discounted notes.


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