Uccmal Posted May 17, 2017 Share Posted May 17, 2017 Since this is in the strategy section.... I am having a serious rethink on strategy around oil. Will elaborate as I think it through. I no longer believe that we will ever see the price rise. That is not to say that oil cos. cant be profitable, just that most will be marginally profitable. Pretty much think this is the consensus (oil price will never rise) now. I prefer the other side. Time to revert to the mean.... https://pbs.twimg.com/media/DAAOubsUMAA-gO7.jpg:large https://pbs.twimg.com/media/DAAO3_XUQAAhmZo.jpg Feels eerily like 1999/2000.... 5/16/17 Most Consensus Trades - bearish inflation theme (commodities) - short energy - long US tech - short CAD https://twitter.com/PainCapital/status/864707488213475328 You nailed it. I am wrestling with the technological improvement aspect of the drilling itself, and simultaneously with the potential movement toward rapid reduction in demand for oil. . I still haven't really coalesced my thoughts around everything. But what I see at the moment is not compelling for oil rising in price. The IEA predictions are only economic activity extrapolations, and subject to revision, which always seems to be downward. They are not accounting for adoption of alternative tech. OPEC was suppose to save the day. Instead they are barely holding their own against rapidly advancing technology from other jurisdications, most notably the US and Canada. I am not convinced any amount of cutting on their part will make a difference to the oil price. To be fair this is hardly an original idea on my part. My primary holding is Whitecap, with some PWT, and BTE. They are all benefiitting from the advances in tech. and the associated reduction in costs. I am not sure how to take this other than one wants to hold companies that will thrive in this environment. That is the tricky part, especially if demand falls off. As I said, I am still trying to figure this out. Obviously, I cant know it all, and have therefore taken the steps of selling all of my oil stocks in all of my tax free accounts (TFSA and RSPs). I dont like having the potential of not having tax losses available should it come to that. I have also reduced my overall portfolio dedicated to E&P stocks down toward 10 %. Link to comment Share on other sites More sharing options...
SharperDingaan Posted May 17, 2017 Share Posted May 17, 2017 It is fairly well documented that in the investment world, the consensus view is almost always wrong. Whether the view is right or wrong it’s hard to fire you if you’re forecasts were in line with the herd; we all got it wrong. An investor is paid to get it right. Every manufacturer knows that you keep inventory to buffer supply/demand disruption, & moderate price volatility; the bigger the inventory the smaller the price ripple. We’re not going to see 70+ oil until that excess inventory is gone. SA & Russia seem to think that it’ll be another 9 months. Every speculator knows that spot and forward prices are closely linked; to change spot go big in the forward market, & use the 90%+ leverage of the contracts to do it. Game the headlines to produce a small change & magnify it by your leverage - & it’s much less risk if you’re the name-brand player. Hence, we have a gamed short-term forward market, a gamed mid-term inventory market (OPEC+), and a largely un-gamed long-term supply/demand market. Value investors play in the long term space, but ‘see’ gamed short-term and mid-term markets; gaming not in our favour questions judgement. Lowering inventory moves the long-term forward; it’s harder to game when there’s less physical to game against. Rising threat of global instability moves the long-term forward. However, the long-term catches up with everybody; and there are no exceptions. So …. play the game, but hold the gains in growing quantities of low cost stock. Same total $ investment, but now many more shares, and all of them higher up the quality curve. This is when the pythons get fat. And comes the day the long-term catches up - rinse & repeat by borrowing against the stock; not selling it, lend it out for fee income, & collect the dividends. Minimal tax drag, continually rising cash-flow, and a growing treasury of high quality assets if you get into trouble. What’s not to love. Thank you, Mr Market SD Link to comment Share on other sites More sharing options...
sculpin Posted May 17, 2017 Author Share Posted May 17, 2017 Since this is in the strategy section.... I am having a serious rethink on strategy around oil. Will elaborate as I think it through. I no longer believe that we will ever see the price rise. That is not to say that oil cos. cant be profitable, just that most will be marginally profitable. Pretty much think this is the consensus (oil price will never rise) now. I prefer the other side. Time to revert to the mean.... https://pbs.twimg.com/media/DAAOubsUMAA-gO7.jpg:large https://pbs.twimg.com/media/DAAO3_XUQAAhmZo.jpg Feels eerily like 1999/2000.... 5/16/17 Most Consensus Trades - bearish inflation theme (commodities) - short energy - long US tech - short CAD https://twitter.com/PainCapital/status/864707488213475328 You nailed it. I am wrestling with the technological improvement aspect of the drilling itself, and simultaneously with the potential movement toward rapid reduction in demand for oil. . I still haven't really coalesced my thoughts around everything. But what I see at the moment is not compelling for oil rising in price. The IEA predictions are only economic activity extrapolations, and subject to revision, which always seems to be downward. They are not accounting for adoption of alternative tech. OPEC was suppose to save the day. Instead they are barely holding their own against rapidly advancing technology from other jurisdications, most notably the US and Canada. I am not convinced any amount of cutting on their part will make a difference to the oil price. To be fair this is hardly an original idea on my part. My primary holding is Whitecap, with some PWT, and BTE. They are all benefiitting from the advances in tech. and the associated reduction in costs. I am not sure how to take this other than one wants to hold companies that will thrive in this environment. That is the tricky part, especially if demand falls off. As I said, I am still trying to figure this out. Obviously, I cant know it all, and have therefore taken the steps of selling all of my oil stocks in all of my tax free accounts (TFSA and RSPs). I dont like having the potential of not having tax losses available should it come to that. I have also reduced my overall portfolio dedicated to E&P stocks down toward 10 %. I have serious doubts surrounding the hype that renewables & tech is going to make a serious dent in oil demand. For example read this article about EVs... Here is an excellent article examining the potential for electric cars to displace oil consumption in vehicles. This is a must read.... http://oilprice.com/Energy/Energy-General/The-EV-Myth-Electric-Car-Threat-To-Oil-Is-Wildly-Overstated.html The EV Myth – Electric Car Threat To Oil Is Wildly ... oilprice.com At the outset of the 2014 oil collapse, slacking oil demand growth was often cited as a major contributor to the sharp decline in oil prices. In September 2014, the ... "One of the most powerful arguments against sustained oil demand growth is the ongoing and expected growth in the electric car market, a trend driven by two powerful forces: innovation and policy support. The former remains in full force; however policy support is questionable in the Trump era (34 percent of the global EV car fleet is in the U.S.). The Paris climate deal aims to have 100 million electric cars on the road by 2030 or roughly 6.6 percent of the expected car fleet in the world by then, such target equates to a 100-fold increase in the global EVs stock. These numbers sound impressive except for the fact that they have a negligible impact on global oil demand." Link to comment Share on other sites More sharing options...
Cardboard Posted May 17, 2017 Share Posted May 17, 2017 And up she goes despite a decent drop in U.S. stocks! A bull market climbs a wall of worries. This so called technological advancement making some believe that shale is now as cheap as OPEC or other sources of production is a myth. Lower 48 States production was up a grand total of 12,000 barrels/day last week... Do you think this is sufficient to offset the annual global decline rate of 3 to 5 million barrels/day? If you look closely at the rig count each week, you will have noticed that the only noticeable increased activity in recent months has been in the Permian. The Eagle Ford, Bakken saw a nice jump in activity last year as oil moved from the lows then you saw stagnation afterwards. This tells me that they are not profitable at this oil price and $50 was the minimum to prune assets and retain land. Offshore saw no increased activity whatsoever. The Permian has lower cost areas but, I am also thinking that we are also seeing a lot of low hanging fruits being harvested. Moreover, cost pressure is building up and this can be read in most E&P reports with staffing, equipment availability, supply issues. While true that better techniques such as sliding sleeves, better fracking spacing, pad drilling are certainly helping development cost, there is simply not enough oil being produced from the Permian, and never will be, to offset all global factors. Regarding the replacement of oil, that is another myth from the leftist media. Everyday I see article after article about renewables taking over, robots taking over 50% of jobs in 5 years, etc. Plain insanity! While there will be a move overtime to find new source of energy, competition and cost will remain in place. Lack of key ingredients such as silver, rare metals and other difficulties in producing and disposing of lithium battery will continue to cause issue in the short to medium term. Then the longer oil stays at these levels, the higher supply risk increases. You have major producing countries at risk of default and civil unrest. I am surprised that Venezuela has not defaulted yet, they must be very close. Then you have zero long term development or production that takes 3 to 5 years to see the light of day. So I would bet that we will see $100 oil before we see its elimination or even robots taking over! LOL! Cardboard Link to comment Share on other sites More sharing options...
SharperDingaan Posted May 17, 2017 Share Posted May 17, 2017 EV cars actually make it neutral at best, & more likely worse. In most cases the bulk of that E will come from a power station, miles away, burning either coal or gas. Whatever it produces will also be subject to upwards of 30% in 'line loss' (heat, buzz, etc.) in getting the E to your outlet. On hot days, the grid will also be carrying less E to prevent the lines melting. Granted, E can come from closer windmills & solar - & suffer less 'line loss'. It can also come from Hydro - if we have the water; but most of it will be Nuclear as EV cars constantly plugged in will be pushing up base load in a big way. Clean means no nukes, and no coal - so if you don't have local solar/windmills (in quantity), the cost of E is going up. Suddenly the cost of running EV isn't much different to the the cost of running SUV. Of course EV will come; & obvious if you live in China, & cant breathe for the smog. But outdated power grid, & far away power stations are material bottlenecks - that will take at least 10-15 years to clear from standing start. So for the reasonable future, at least in NA - every additional EV on the road is great for business! SD Link to comment Share on other sites More sharing options...
Uccmal Posted May 17, 2017 Share Posted May 17, 2017 I can always count on you guys for well reasoned, thoughtful responses. I was buying on the dips,and buying on the dips, which keep coming, and ended up way overexposed, IMO, to oil, directly through E&Ps. I also have further exposure indirectly via Russell Metals, Mullen Group and to some extent via Enbridge. Those I wont touch because they benefit in any infrastructure scenario. I am just being sensible, and trying to destroy the thesis. The thesis (of oil prices going really high) may be intact, or it may not, or it may have changed. It has certainly been moved further out in time. And none of this was expected 3 years ago! The shale revolution came out of nowhere more or less. If anything the last few years have taught me is that we cannot even remotely predict how IT will change any industry. i.e. I was backpacking in AZ last month and I met the Garmin killer. A simple app. that runs on any recent smartphone that uses the onboard wifi transmitter/reciever and makes your smartphone into a GPS. Bye, bye Garmin. Link to comment Share on other sites More sharing options...
Paarslaars Posted May 17, 2017 Share Posted May 17, 2017 Well, almost any software based product suffers from that risk. I would not put a long standing industry like oil in that category. Disruptive technology is a risk for any industry but there are a lot more barriers in oil than in the IT sector that it needs to overcome to actually become disruptive. Link to comment Share on other sites More sharing options...
Cigarbutt Posted May 17, 2017 Share Posted May 17, 2017 Will try a humble contribution here. Disclosure: historical bias, often late recognizing trends and have invested in value traps. Paradigm shifts and cycles. Oil is not the same as software, higher barriers. But. I submit that it may be very hard to "manage" cycles in the oil industry. A lot of unknowns. That got me thinking about another paradigm shift that occurred not so long ago after all. In the late 19th century, people/merchandise were carried directly or indirectly by horses mostly. Oil then was mostly used to "illuminate". Worked better than whale fat. Horses came with predictable side effects. In 1894, there came the Great Horse Manure Crisis. link: http://www.historic-uk.com/HistoryUK/HistoryofBritain/Great-Horse-Manure-Crisis-of-1894/ " This problem came to a head when in 1894, The Times newspaper predicted... “In 50 years, every street in London will be buried under nine feet of manure.” This became known as the ‘Great Horse Manure Crisis of 1894’. The terrible situation was debated in 1898 at the world’s first international urban planning conference in New York, but no solution could be found. It seemed urban civilisation was doomed. However, necessity is the mother of invention, and the invention in this case was that of motor transport. Henry Ford came up with a process of building motor cars at affordable prices. Electric trams and motor buses appeared on the streets, replacing the horse-drawn buses. By 1912, this seemingly insurmountable problem had been resolved; in cities all around the globe, horses had been replaced and now motorised vehicles were the main source of transport and carriage. " The solution had already been invented in 1885. https://www.pinterest.com/pin/402790760400822651/ Apart from some delusional "visionaries" though, in 1894 the problem was horse manure. By 1912, horse riding became a hobby and nobody talked about CO2 emissions. Hard to say what will happen in the next 10 to 15 years. Maybe completely irrelevant. And then, who am I to say? Link to comment Share on other sites More sharing options...
Paarslaars Posted May 17, 2017 Share Posted May 17, 2017 Good example, let's apply it to our case. In comparison, you could say that Horses vs Motorized vehicles could be similar as Gasoline vs Electric cars. However, I'm not investing in a car company here, I'm investing in a commodity company. So in your story, what happened to hay? Or other food horses eat? Did the industry tank or take a big hit by 1912? A quick search on my end only comes up with a constant rising hay demand. It doesn't matter what happened to the horses, it matters what happened to the fuel they consumed. Link to comment Share on other sites More sharing options...
Cigarbutt Posted May 17, 2017 Share Posted May 17, 2017 The example used was just to illustrate an essentially unexpected paradigm shift in a critical part of peoples' lives. I have no special interest in horses. See page 2. http://www.americanequestrian.com/pdf/US-Equine-Demographics.pdf Apparently the horses population has been trending up lately for recreation purposes. I will only say (message) that if you look at the population trend from 1915-1960, you realize 1- looking prospectively from the early 20th century, that this was quite an unexpected and massive decline and 2- if you were in the hay business then, you may have wanted to look at other outlets for your product. Back to the use of oil in transportation and potential paradigm shifts. Today, we (most of us) drive around using a vehicle equipped with an internal combustion engine and fill the tank periodically. I submit that, 10, 15 or 20 years from now, the situation may be completely different. Transportation is a key sub-component of oil demand and overall energy demand. Link to comment Share on other sites More sharing options...
Cardboard Posted May 18, 2017 Share Posted May 18, 2017 Comparing horses vs cars and then electric powered vehicles vs fossil fuel powered vehicles is a really bad comparison. Where is the paradigm shift in advantage of one over the other? Got to be a little easier to see the differences in the earlier case I would think... Instead of talking stuff like this, why don't you spend the time and read the article posted by Sculpin? Cardboard Link to comment Share on other sites More sharing options...
Uccmal Posted May 18, 2017 Share Posted May 18, 2017 Well, almost any software based product suffers from that risk. I would not put a long standing industry like oil in that category. Disruptive technology is a risk for any industry but there are a lot more barriers in oil than in the IT sector that it needs to overcome to actually become disruptive. I was using the term IT loosely. But IT alone has led to massive cost savings in the cost of explorarion and drilling. There are very few dry wells drilled now. This is very recent. The whole horizontal drilling development has been developed by advances in control systems and material science. Fracking is old but the methodology has advanced. Moving from oil to transportation. I dont think we see autonomous cars anytime soon, but a leap in battery technology will rapidly kill the IC engine. The reliability, and lack of moving parts of electric cars makes them far more efficient, more durable, and cheaper to operate. None of us here can answer when the tipping point will be reached. The problem for an investor will not happen when oil demand falls off by 30 million bpd. The price for the commodity will come off when there is even an inkling that demand is falling off. All it will take is for demand to drop by 1 or 2 m bpd and suddenly the bottom will fall out. And then we are caught in a seesaw. Link to comment Share on other sites More sharing options...
valcont Posted May 18, 2017 Share Posted May 18, 2017 Comparing horses vs cars and then electric powered vehicles vs fossil fuel powered vehicles is a really bad comparison. Where is the paradigm shift in advantage of one over the other? Got to be a little easier to see the differences in the earlier case I would think... Instead of talking stuff like this, why don't you spend the time and read the article posted by Sculpin? Cardboard Ever so polite Cardboard. Love his outbursts as long as I am not at the receiving end. Link to comment Share on other sites More sharing options...
Cigarbutt Posted May 18, 2017 Share Posted May 18, 2017 OK. I just re-read the article. I'll stick to what I know a lot about. Which is not very much. Link to comment Share on other sites More sharing options...
Uccmal Posted May 18, 2017 Share Posted May 18, 2017 Comparing horses vs cars and then electric powered vehicles vs fossil fuel powered vehicles is a really bad comparison. Where is the paradigm shift in advantage of one over the other? Got to be a little easier to see the differences in the earlier case I would think... Instead of talking stuff like this, why don't you spend the time and read the article posted by Sculpin? Cardboard Ever so polite Cardboard. Love his outbursts as long as I am not at the receiving end. Except you have to understand that Nawar has a big horse in this game. He has also been very wrong over the past couple of years. If you read the article continue onto the comments section where every single one of his pronouncements is met with a well reasoned rebuttle. Link to comment Share on other sites More sharing options...
no_free_lunch Posted May 18, 2017 Share Posted May 18, 2017 OK. I just re-read the article. I'll stick to what I know a lot about. Which is not very much. I think you are right but I am not sure of the timing. FWIW I remember making the same type of argument back 15 years ago. Of course we are much closer now but it has alwasy felt like tech is about to kick fossil fuel's ass. Link to comment Share on other sites More sharing options...
Cigarbutt Posted May 18, 2017 Share Posted May 18, 2017 BTW, this is not about being right or else. In fact, my humble take is that, absent a global recession, the next 12-18 months will likely be favorable for oil prices because of: -well documented supply crunch issues. -dynamics of the Aramco IPO. However, longer term, I submit that innovation (both in the field and at the industry level) may go against the long thesis. If you're the Minister of Energy of Saudi Arabia, I submit that choices are limited. As value investors, choices are almost unlimited. So just looking at discomforting and disconfirmatory evidence. Link to comment Share on other sites More sharing options...
Uccmal Posted May 18, 2017 Share Posted May 18, 2017 OK. I just re-read the article. I'll stick to what I know a lot about. Which is not very much. I think you are right but I am not sure of the timing. FWIW I remember making the same type of argument back 15 years ago. Of course we are much closer now but it has alwasy felt like tech is about to kick fossil fuel's ass. My recollection is that around 15 to 10 years ago we had peak oil, and were about to run out forever. On this boards predecessor I was arguing with a guy about their being near unlimited fossil fuels underground. My argument was that the world had been covered by jungle for hundreds of millions of years and we were not likely to run out of fossil fuels. Anyway, I digress. And tech. development is rapidly killing coal. Link to comment Share on other sites More sharing options...
Uccmal Posted May 18, 2017 Share Posted May 18, 2017 BTW, this is not about being right or else. In fact, my humble take is that, absent a global recession, the next 12-18 months will likely be favorable for oil prices because of: -well documented supply crunch issues. -dynamics of the Aramco IPO. However, longer term, I submit that innovation (both in the field and at the industry level) may go against the long thesis. If you're the Minister of Energy of Saudi Arabia, I submit that choices are limited. As value investors, choices are almost unlimited. So just looking at discomforting and disconfirmatory evidence. Well said. I am not trying to win an argument. I respect the opinions of the major posters on this thread, and need to operate with as much perspective as possible. Its an anything goes environment and to me it would be extremely risky to be 50% or 100% invested, in oil and gas, such as Russia, and Saudis are. The same applies to me. Link to comment Share on other sites More sharing options...
Cardboard Posted May 18, 2017 Share Posted May 18, 2017 Nawar has been nearly spot-on on all his oil fundamental analysis. What he failed to predict was the idiocy of an American president who signed the Iran deal which added nearly 2 million barrels/day on the market. A country that continues to wish death to America, Israel and the West and that works continually on the bomb and ICBM's with the help of its friend North Korea: http://www.cnbc.com/2017/05/15/former-cia-agent-says-iran-aiding-north-korea-as-new-missile-test-emboldens-pyongyang.html How long Trump or any other president will let that go on is anyone's guess. Regarding electric vehicles, it will always be about ownership cost. If you remove government subsidies there is simply no comparison between the two and even if you add them in, it is still tough to go with an electric car. Moreover, as SD mentioned, how do you produce the power to generate the electricity? With line loss, coal or gas power generation, some of the greens buying these cars actually polute more than the people buying the latest gasoline engines with very good fuel economy. Overtime, solar power and better batteries will help change the equation. You simply have to be careful about not being ahead of your time which is often a costly experience. Cardboard Link to comment Share on other sites More sharing options...
Uccmal Posted May 18, 2017 Share Posted May 18, 2017 Overtime, solar power and better batteries will help change the equation. You simply have to be careful about not being ahead of your time which is often a costly experience. Cardboard Lol, Aside from entering stock positions a year or two early I habe never managed to be ahead of my time. Behind the times is more like it. Link to comment Share on other sites More sharing options...
rkbabang Posted May 18, 2017 Share Posted May 18, 2017 Overtime, solar power and better batteries will help change the equation. You simply have to be careful about not being ahead of your time which is often a costly experience. Cardboard Lol, Aside from entering stock positions a year or two early I habe never managed to be ahead of my time. Behind the times is more like it. Can I claim to be ahead of my time when I sell a stock too early? Link to comment Share on other sites More sharing options...
goldfinger Posted May 18, 2017 Share Posted May 18, 2017 OK. I just re-read the article. I'll stick to what I know a lot about. Which is not very much. I think you are right but I am not sure of the timing. FWIW I remember making the same type of argument back 15 years ago. Of course we are much closer now but it has alwasy felt like tech is about to kick fossil fuel's ass. My recollection is that around 15 to 10 years ago we had peak oil, and were about to run out forever. On this boards predecessor I was arguing with a guy about their being near unlimited fossil fuels underground. My argument was that the world had been covered by jungle for hundreds of millions of years and we were not likely to run out of fossil fuels. Anyway, I digress. And tech. development is rapidly killing coal. Peak oil is not about how much oil there is in the ground but rather how economical it is to extract what remains. Link to comment Share on other sites More sharing options...
Cardboard Posted May 19, 2017 Share Posted May 19, 2017 Watch the results of the Iranian election tomorrow. If Rouhani is out it could mean more agressivity and a return of sanctions or worst. Cardboard Link to comment Share on other sites More sharing options...
Uccmal Posted May 19, 2017 Share Posted May 19, 2017 OK. I just re-read the article. I'll stick to what I know a lot about. Which is not very much. I think you are right but I am not sure of the timing. FWIW I remember making the same type of argument back 15 years ago. Of course we are much closer now but it has alwasy felt like tech is about to kick fossil fuel's ass. My recollection is that around 15 to 10 years ago we had peak oil, and were about to run out forever. On this boards predecessor I was arguing with a guy about their being near unlimited fossil fuels underground. My argument was that the world had been covered by jungle for hundreds of millions of years and we were not likely to run out of fossil fuels. Anyway, I digress. And tech. development is rapidly killing coal. Peak oil is not about how much oil there is in the ground but rather how economical it is to extract what remains. And that got solved rather rapidly. Link to comment Share on other sites More sharing options...
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