Future strategy to survive discovering 1 out of every 20 bbls of oil we now use.

[Joe689]

Four ships damaged by some sabotage attack in the ME.  Oil starts up 3%, ends down 1% for 4% move today.  US/CHINA trade risk > ME shipping risk.

[SharperDingaan]

This isn't likely to last very long

https://globalnews.ca/news/5274129/saudi-arabia-drones-oil-infrastructure-attack/

 

Drones are the poor mans Tomahawk.

They can carry missiles/mines, are cheap, are hard to detect, do not have to come back, and can be launched from anywhere.

Simple matter to swarm a ship loading facilty, and wreck everyones day.

 

SD

[sculpin]

From the commodity-cycle lows reached back in both 1970 and 2000, natural resource equities outperformed the broad stock market by five-fold over the following decade. Today, both commodity prices and natural resource-related equities have never been more depressed relative to the broad market.

 

http://blog.gorozen.com/blog/commodity-and-natural-resource-equities-undervalued-versus-broad-market

[sculpin]

And now some comments from Oxford Energy which seem to sum up the current state of the crude markets:

 

 

Looking ahead into the second half of 2019, the oil market faces the key issue of how this divergence in expectations and the mixed signals from the physical and futures markets will eventually be resolved. If 2018 is a good guide, the price level will eventually increase to reflect the current tightness in the physical market.

 

In a way, this underlines the current bullish view that oil is ‘about to see a violent price spike’. Deep cuts from Saudi Arabia and supply disruptions from Iran and Venezuela saw OPEC output reach low levels of 30.2 mb/d in April 2019 (down from 32.3 mb/d in November 2018); contamination of the Druzhba pipeline is causing a decline in delivered crude from Russia ; deterioration in the geopolitical backdrop is increasing the risk of further output disruptions from Iran, Venezuela, and Libya; and the decline in rig activity and a slowdown in US shale production growth all point to a tighter supply picture.

 

The IEA’s warning that investment levels are falling short of what will be needed to meet global oil demand only provides further support for this thesis. – Oxford Energy

[SafetyinNumbers]

And now some comments from Oxford Energy which seem to sum up the current state of the crude markets:

 

 

Looking ahead into the second half of 2019, the oil market faces the key issue of how this divergence in expectations and the mixed signals from the physical and futures markets will eventually be resolved. If 2018 is a good guide, the price level will eventually increase to reflect the current tightness in the physical market.

 

In a way, this underlines the current bullish view that oil is ‘about to see a violent price spike’. Deep cuts from Saudi Arabia and supply disruptions from Iran and Venezuela saw OPEC output reach low levels of 30.2 mb/d in April 2019 (down from 32.3 mb/d in November 2018); contamination of the Druzhba pipeline is causing a decline in delivered crude from Russia ; deterioration in the geopolitical backdrop is increasing the risk of further output disruptions from Iran, Venezuela, and Libya; and the decline in rig activity and a slowdown in US shale production growth all point to a tighter supply picture.

 

The IEA’s warning that investment levels are falling short of what will be needed to meet global oil demand only provides further support for this thesis. – Oxford Energy

 

Thanks Sculpin.

 

It seems like there is a disconnect from the macro traders who want to short oil and other commodities because they are worried about a recession or worse. I think that view is further amplified by quants which are driven by various models that take cues from various factors (interest rates, economic date etc..) that result in the same conclusions as the macro traders. On the other side, those who are exposed to physical markets and have built the supply/demand forecasts think we are heading to shortages in commodities like oil, copper, uranium etc....

 

It seems to me those exposed to physical markets are doing more work and have a better basis for their views but the macro and quants are much bigger players in the futures markets and that is driving near term moves.

 

It sure feels scary to be long a bunch of commodity stocks if we are heading into a recession because it's hard to forget how bad it was last time. This time it's hard to argue we have a lot of froth in commodity equities or commodity prices but there still aren't many managers willing to stick their necks out. It's too dangerous to underperform for most PMs.

 

 

[sculpin]

https://www.forbes.com/sites/georgeschultze/2019/05/24/buffetts-betting-on-oil-and-hes-rarely-wrong/#297eb84171fc

 

May 24, 2019, 07:27am

 

Buffett's Betting on Oil, and He's Rarely Wrong

 

George Schultze

[sculpin]

https://www.bnnbloomberg.ca/video/energy-companies-need-to-become-buyers-of-their-stocks-eric-nuttall~1690973

 

[sculpin]

Despite Headlines, Global Oil Demand Remains Robust

 

Despite 2019’s rally in oil prices, investors remain bearish towards oil-related equities. While Brent and WTI prices rallied between 25 and 30% from their Christmas Eve-lows, oil-related stocks advanced by only half that amount. In past blogs we explained how certain high-quality E&P companies (not all mind you) are generating real value like never before, despite the common wisdom that the oil and gas E&P “model is broken” and some investors complain that the sector as a whole has become “un-investible.” While this line of thinking is pervasive, nothing could be further from the truth and we will explain why the fundamentals are more bullish today than we ever recall seeing them. Far from being broken, we think that Tier 1 E&Ps offer some of the best investments in the market today.

 

Global oil demand remains extremely strong. The IEA released its 2018 Global Energy & CO2 Status Report on March 26, 2019, stating that global primary energy demand surged last year. Despite the barrage of bearish headlines, total energy demand grew by 2.3% in 2018 – twice the average rate of the previous decade. Every country goes through a period of strong energy demand growth (the S-Curve). The number of people simultaneously going through this period has jumped from an average of 700 million between 1970 and 2010 to over four billion today. The importance of this shift cannot be overstated and will persist for many years to come.

 

 

 

Furthermore, we believe global primary energy demand will be revised even higher, driven by adjustments to global crude demand. Global oil demand makes up approximately 35% of total primary energy demand. The IEA estimates that global oil demand grew by 1.3 mm b/d or approximately 1.3% last year. According to their latest report, demand softened during Q4 as global economic activity deteriorated. Even though this view was largely echoed in the press, the data suggests otherwise.

 

 

 

The IEA estimates Q4 demand averaged 99.6 mm b/d while global supply averaged 101.9 mm b/d implying inventories should have grown by a very large 2.3 mm b/d (consistent with a global economic slow-down). Instead, inventories actually declined during Q4 by 100,000 b/d. Even factoring in “floating storage” (which in our experience usually ends up being revised away as understated demand), missing barrels still reached a record 1.8 m b/d, based on the IEA’s figures during Q4. Longtime readers know we believe these “missing barrels” are actually understated emerging market S-Curve-related demand. For 2018 as a whole, the “missing barrels” averaged 900,000 b/d. If our models are correct and these missing barrels are actually understated demand, then 2018 global oil consumption actually grew by 2.2% to reach 101.1 mm b/d, implying global primary energy grew by 3.0% or nearly two-and-a-half times the average of the past decade. Far from reaching “peak demand,” the world is now entering into a period of sustained accelerating consumption – a period we are calling the “golden age of demand.”

 

http://blog.gorozen.com/blog/despite-headlines-global-oil-demand-remains-robust?utm_campaign=Weekly%20Blog%20Notification&utm_source=hs_email&utm_medium=email&utm_content=73191832&_hsenc=p2ANqtz-8h-f2cOirTDj6PGLgEacxmLhmv5m85e52KSXuK3pJFEToiqZdOqjCYlTD7lAp0X60t28xQgcG7uFKv4MtALkuZEuZulw&_hsmi=73191832

 

[tombgrt]

Well, something isn't adding up. Especially in the case demand is being understated. Iran exports are supposed to be at 0.4 mm bd, us adjustment numbers are going parabolic, inventories rising everywhere, Venezuela down the frapper, OPEC still cutting.

 

I have no clue anymore. I officially feel that it is impossible to get market direction right even over a longer time horizon.

[sculpin]

RJ - Brent MEH spread encouraged world inventories in the US market...

 

That means we think net imports are poised to fall by as much as 2 million bpd (or 5 to 10 million barrels per week) over the next month.

 

As that reverses, U.S. inventories should begin falling sharply as we move into mid-summer. Essentially, we think global inventories "sloshed

around" into the U.S. over the past few weeks and we expect the reverse to occur in the coming months. On its own, inventories "sloshing around"

aren't necessarily negative as long as they don't suggest any change in the global supply demand balance; if the inventory flows are indicative of

a weakening of demand overseas, that would be a bigger issue. However, we do not think this is the case

 

In the last two weeks, the plug averaged ~850,000

bpd adding ~6 million barrels per week to inventory levels (which lines up more closely to what the spread would have implied for imports and

inventory builds). As we show in the adjacent chart, outside of 4Q18 (interestingly 4Q has consistently been the most elevated quarter – likely a

function of year end weirdness around exports/ad valorem taxes), 2Q19 has been the highest quarter on record at ~440,000 bpd. Tying the plug

back to our expectation for higher net imports, we view most of the unaccounted for barrels as stemming from understated net imports.

 

[Cardboard]

American manipulation at his finest!

 

For a while earlier this year, oil was dangerously pushed rapidly higher by a growing number of speculators. Then as usual fear came about and now they are liquidating their futures contracts while shorts circle around them like sharks.

 

The only place in the world where inventories are flat to growing is at Cushing, Oklahoma. There is an over-abundance of that light oil/condensate from that Permian field that nobody wants. It lacks in some chemical elements to make gasoline and is certainly no good to produce heavier fuels such as kerosene and diesel.

 

Don't believe me? Then why is Louisiana light selling for over $67 or a full $9 above Cushing? It is not pipeline restriction or cost, it is quality. Same for Mexican basket or thick stuff selling for over $60. That is what the refineries need. If the U.S. government and people had a few more brain cells, they would fast track Line 3 and Keystone XL asap to get their hands on much needed heavier grades to feed their refineries.

 

Right now oil from the OPEC basket sells for $2.70 over Brent. We have backwardation almost everywhere. Oil for delivery now is in high demand and things are tight. You would not tell by the looks of things but, that is the case.

 

https://oilprice.com/Energy/Crude-Oil/Saudis-Raise-Oil-Prices-To-Asia-As-Demand-Spikes.html

 

Oh, and there is an ultimatum for the end of May in Nigeria. Yup! The rebels are planning to kill production unless their demands are met.

 

Libya is descending into civil war, Venezuela keeps getting worst by the day and who knows what else is going on with Iran?

 

Someday there will be a big supply shock. Then gurus on Wall Street will call this some 6 sigma event or black swan while it is already happening live.

 

Cardboard

[SharperDingaan]

IEA reporting has been highly suspect for a very long time.

We use it simply because it is updated weekly, available, and everyone else uses it. Little different to using a forward strip to determine todays maket forecast of future prices. It's what we have; accuracy has little to do with it.

 

In today's trade war climate, everyone is producing less. In the near term, if you're not producing, you don't need as much oil.

And in the near term, Gulf War III may also be a lot nearer than everyone expects; if so, prudence would dictate inventory builds.

 

ME media reporting has suddenly gone very quiet in NA.

Iran sanction export 'waivers' have also recently terminated, and US military 'presence' has markedly increased in the region.

Not a good combination.

 

SD

 

[tombgrt]

Quite certain Iran is getting plenty of oil out. Simply no way they aren't.

[Spekulatius]

It seems that we have an more do of an issue with  quality than with crude supply. i‘d rather own those companies that benefit from oversupply or equalizers of supply like pipeline companies, refineries, midstream or chemicals companies (processing Ethan and NG) than E&P‘s. Typically, these companies show better cash flows and pay nice dividends, unlike E&P’s that generally don’t generate FCF.

[Cardboard]

"Typically, these companies show better cash flows and pay nice dividends, unlike E&P’s that generally don’t generate FCF."

 

You certainly have not done your homework on respectable Canadian E&P's lately.

 

Cardboard

[SharperDingaan]

At time of writing, WTI is USD 54.09.

The US sinks 3 tankers, shuts down 3.3M (25%) of Iranian exports/month (30(136,000-24,000)); and WTI falls 24% from the USD 71.14 when a Saudi tanker was attacked maybe 2 weeks prior? At the same time that the US is observed aggressively building inventory - PRIOR to its tanker strike. To most people this is preparation for an extended 'stay'; price should be be reflecting a conflict premium, not a conflict discount.

 

Amazing what a news blackout and the media distraction of a foreign state visit can do! ;D

https://www.businessinsider.com/trump-baby-blimp-ready-president-lands-state-visit-2019-6

 

https://oilprice.com/Latest-Energy-News/World-News/US-Forces-Blow-Up-Three-Oil-Tankers-In-Syria-Enforcing-Oil-Embargo.html

 

The strike was carried about by coalition planes, which hit three oil tankers, leaving four dead. The coalition has not yet made a statement about the attack. In the area controlled by Assad, oil consumption stands at around 136,000 bpd. Production, meanwhile, is only 24,000 barrels per day.

 

https://dailynewsegypt.com/2019/06/02/iran-warns-against-any-gulf-clashes-threatens-oil-would-surpass-100-per-barrel/

 

"Yahya Rahim Safavi who served before as the chief commander of the Islamic Revolutionary Guard Corps threatened that crude oil prices will exceed the $100 per barrel mark if any clash between the two countries took place.

 

Following the attack oil prices jumped to around $71.14 per barrel, after reports of drone attack at oil pumping stations in Saudi Arabia, following the two Saudi oil tankers which were attacked off the coast of the UAE on Monday."

 

SD

 

[Cardboard]

"The US sinks 3 tankers,..."

 

I truly thought you were joking. Then I saw the link that you posted and realized that this was real...

 

We are living in a time of unbeliveable complacency. People keep dreaming, hoping and giving a chance to all kinds of unicorns and pot companies about extravagant future profits projections while the most important commodities in the world (oil, copper, uranium, natural gas and many other) are being totally forgotten and dismissed. Price to pay will be very high someday.

 

Cardboard

[Spekulatius]

"Typically, these companies show better cash flows and pay nice dividends, unlike E&P’s that generally don’t generate FCF."

 

You certainly have not done your homework on respectable Canadian E&P's lately.

 

Cardboard

 

CNQ looks interesting for example. They acquired Devon’s in in situ oilsand assets for 3x EBITDA. Now that looks like a good deal to me:

https://www.cnrl.com/upload/multi_media_element/201/04/0529-devon-canada-asset-acquistion-presentation.pdf

[sculpin]

 

Oil Tightness Obscured

 

by Trip Rodgers, CFA | Jun 4, 2019

 

We believe supply-driven tightness in crude has been masked by investor macro concerns relating to demand, as well as the recent weather-impacted rise in US oil inventories.

 

In our view, the magnitude of these supply factors more than offsets potential demand slippage and should result in a continuation of oil tightness.

 

We see significant value in many oil-related equities, particularly those boosting free cash flow through enhanced operating efficiencies and capital spending discipline.

 

https://www.bpcfunds.com/content/oil-tightness-obsecured/

 

[Spekulatius]

"Typically, these companies show better cash flows and pay nice dividends, unlike E&P’s that generally don’t generate FCF."

 

You certainly have not done your homework on respectable Canadian E&P's lately.

 

Cardboard

 

CNQ looks interesting for example. They acquired Devon’s in in situ oilsand assets for 3x EBITDA. Now that looks like a good deal to me:

https://www.cnrl.com/upload/multi_media_element/201/04/0529-devon-canada-asset-acquistion-presentation.pdf

 

Actually, if you want to a good laugh read these press releases about the same transaction from the seller (Devon) and the buyer ( CNR). You couldn’t really tell they are about the same asset (Devon’s Jackfish heavy oil assets) and some of the numbers are absurdly far apart.

 

Devon’s press release:

https://www.devonenergy.com/news/2019/Devon-Energy-Announces-Strategic-Exit-of-Canadian-Business-for-CAD-38-Billion

 

Sounds like they got a great price for a barely cash flowing asset.

 

CNR press release:

https://www.cnrl.com/upload/multi_media_element/201/04/0529-devon-canada-asset-acquistion-presentation.pdf

 

Sound like they got the bargain of a lifetime (3x EBITDA for a long life asset)

 

It’s pretty clear that Devon cherrypicked the numbers to make it appear like they got good money for an underperforming asset. that probably by picking different time periods(2018 vs 2019).

 

 

CNR bought an asset with 128k/bod, 780M brl proved reserves with 1.265B future EBITDA/year. Devon sold an asset with 113k production, 409M brl proved reserves and 238M in field level cash flow.

 

How can they both be right? I am guessing that a change in crude prices can move proved serves around and cash flow, but the extend of divergence is mind boggling.

[bizaro86]

CNQ reported production capacity, Devon reported actual production. On the reserves side, I would guess that is a net vs gross difference. IIRC US O&G companies report production and reserves net of royalties, whereas the Canadian standard is to report gross numbers (total product, including the govt share).

 

I did tons of work on Jackfish in a past life, and I think CNQ got a crazy good deal on this asset. I'm suprised Suncor wasn't willing to pay more for that tbh. CNQ had an operational synergy advantage buying these assets (on both the SAGD and conventional sides) and Suncor wouldn't have wanted the coventional heavy.

 

CVE would have even better synergy on the thermal side, but the market would destroy them if they made another acquisition, even if it was cheap/good.

[Spekulatius]

CNQ reported production capacity, Devon reported actual production. On the reserves side, I would guess that is a net vs gross difference. IIRC US O&G companies report production and reserves net of royalties, whereas the Canadian standard is to report gross numbers (total product, including the govt share).

 

I did tons of work on Jackfish in a past life, and I think CNQ got a crazy good deal on this asset. I'm suprised Suncor wasn't willing to pay more for that tbh. CNQ had an operational synergy advantage buying these assets (on both the SAGD and conventional sides) and Suncor wouldn't have wanted the coventional heavy.

 

CVE would have even better synergy on the thermal side, but the market would destroy them if they made another acquisition, even if it was cheap/good.

 

Thanks, very helpful. I have followed CNQ and I believe, they are one of the better operators and capital allocators.

[bizaro86]

CNQ reported production capacity, Devon reported actual production. On the reserves side, I would guess that is a net vs gross difference. IIRC US O&G companies report production and reserves net of royalties, whereas the Canadian standard is to report gross numbers (total product, including the govt share).

 

I did tons of work on Jackfish in a past life, and I think CNQ got a crazy good deal on this asset. I'm suprised Suncor wasn't willing to pay more for that tbh. CNQ had an operational synergy advantage buying these assets (on both the SAGD and conventional sides) and Suncor wouldn't have wanted the coventional heavy.

 

CVE would have even better synergy on the thermal side, but the market would destroy them if they made another acquisition, even if it was cheap/good.

 

Thanks, very helpful. I have followed CNQ and I believe, they are one of the better operators and capital allocators.

 

I agree with that assessment. CNQ is an extremely effective operator. The company does the same work with less people than its competitors, and spends less on procurement. That sometimes means they skimp on quality, in my opinion, but on average I think they are one of the best operators in the industry.

 

I also think their capital allocation is very good. One risk the market is not considering is Murray Edward's health. He is an exceptional entrepreneur, but is significantly overweight.

[SharperDingaan]

"Two oil tankers were attacked in the Gulf of Oman on Thursday, leaving one ablaze and both adrift, shipping firms said, driving oil prices as much as 4% higher over worries about Middle East supplies." https://ca.reuters.com/article/topNews/idCAKCN1TE0OI-OCATP

 

SD

 

[DooDiligence]

"Two oil tankers were attacked in the Gulf of Oman on Thursday, leaving one ablaze and both adrift, shipping firms said, driving oil prices as much as 4% higher over worries about Middle East supplies." https://ca.reuters.com/article/topNews/idCAKCN1TE0OI-OCATP

 

SD

 

Eeek, I just finished an advanced firefighting refresher for revalidation of my STCW certificate (required to renew a Coast Guard license).

 

I worked on a T2 tanker out of Jebel Ali during Desert Storm but wouldn't want to do it now.