Author Topic: Future strategy to survive discovering 1 out of every 20 bbls of oil we now use.  (Read 152429 times)

investor1

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Hold on to your Cdn heavies....We are bullish on Western Canadian Select

From the Eight Capital report today....

ē   Our big out of consensus call: We are bullish on Western Canadian Select (WCS) pricing. We believe the current differential of US$25/Bbl is unsustainably wide because: A) The rail bottlenecks are temporary and typically clear out around late Q1, early Q2; B) Multiple sources state that the Keystone mainline is back at full rates, which should help reduce Alberta storage levels and mitigate large apportionments on the Enbridge mainline; and C) Shell's 255 MBbl/d Scotford upgrader had a one month unplanned outage in late November. Additionally, we note that Latin American heavy oil exports to the U.S. have been on a significant decline over the past seven years owing to falling production in Mexico and Venezuela. Plus Venezuela's economic woes are likely to continue to negatively impact its production, which recently hit a low not seen since 2003. This is important because the quality of WCS is similar to that of the heavy oil production coming from Mexico and Venezuela. With the U.S. Gulf Coast and Midwest refining complexes being large consumers of this type of heavy oil, we see this being a further benefit to WCS, which is why we expect to see differentials narrowing dramatically from the current US$25/Bbl Spot price in Q2/18 and beyond. BUY rated ATH, MEG, and to some extent CNQ are our best ideas on this. NEUTRAL rated BTE should also benefit.

Would be nice. The spread is particularly painful for a lot of heavy oil producers that hedge their WTI and are basis exposed. CONA is a great example. Probably why the stock hasn't reacted to oil prices. It's hard to see how the spread narrows more permanently over the next 2-3 years. You have continued supply coming online in excess of pipeline takeaway capacity. That means that rail transport costs will set the differential (US$15-$20 / bbl), no matter how much Venezuelan and Mexican imports decrease.


sculpin

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FPA Capital 4Q17 Letter Ė Why We Invest in Energy and Hold Cash

FPA Capital 4Q17 Commentary

Almost 60% of the portfolio is invested in energy-related companies and cash; this compares to less than 5% in energy and 0% in cash for the Russell 2500

Why do we have such a large exposure to energy?

Believe we are in the early stages of another historic multi-year oil bull market
Our energy investment is not just tied to our belief that oil prices will go higher. We see that extreme investor bearishness, and perhaps apathy, have caused oil-related equity performance to disconnect from crude oil commodity performance

Bear argument #1: global demand growth will fizzle out (bears will often cite the following)
Slower global economic growth: thatís looking unlikely since the IMF is now forecasting that only six of 192 countries will register an economic contraction in 2018, the fewest on record
Existential consumption risk in China: crude demand in China is up 7% YTD versus the same period last year, more than double the consensus figure at the beginning of the year
The rise of electric vehicles: EVs make up just 0.1% of the global installed vehicle base, and that miniscule percentage will not change meaningfully over the next 5 years

Bear argument #2: OPEC and its partners, including Russia, will ramp up supply growth
Actions taken since November 2016 and quota compliance data donít back up this argument
For the House of Saud, the most obvious incentive to keep oil supplies tight stems from budgetary constraints; the country needs over $70 oil just to neutralize its fiscal deficit and stop the ongoing bleed of foreign currency reserves
In the Kremlin, we must assume that Putin had its 2018 re-election campaign in mind when he endorsed the 2018 quota extension; Russiaís economy is dependent on crude oil, with 70% of Russian exports related to the oil and gas sector

Bear argument #3: US shale producers will flood the market
There are a few interrelated reasons why US shale will surprises to the downside
Operators focused on their best acreage during the downturn, leaving them with costlier and less productive sites
Weak financial results at top producers despite higher oil prices and focus on best acreage
Investors are pushing E&Ps to better prioritize returns over production growth

With average global demand growth expected to be at least 1.3 million bbl/d in 2018, we estimate the global inventory overhang would clear before the end of next June, or roughly six months prior to the end of OPECís current quota agreement
Last time this level of inventory was reached, oil prices were hovering about $100/bbl, while global demand was about 5 million bbl/d lower than it is today

To conclude, we think itís important to point out how similar this set up looks relative to major oil bull markets of the 1970s and after the dot com bubble

These time periods were preceded by accommodative monetary policy, sky-high equity valuations, robust crude demand, and extremely bearish sentiment
1960-1970: S&P 59% vs WTI 16%; 1970-1980: S&P 47% vs WTI 1004%; 1980-1990: S&P 143% vs WTI -34%; 1990-2000: S&P 300% vs WTI 24%; 2000-2010: S&P -5% vs WTI 162%; 2010-2017: S&P 111% vs WTI -28%; 2018+: ?
Selling our energy stocks today would be akin to selling the farm before a historic harvest

Why is our cash level so high today?

We have simultaneous bubbles across virtually all traditional asset classes

Mechanics are relatively simple to understand: in a low-interest-rate world, investors must buy riskier assets to generate adequate returns, and this in turn drives up the price of those assets
But what will happen now that central banks have begun to unwind the purchases and raise rates?
We expect these market distortions to eventually collapse under their own weight, providing patient, cash-rich investors with substantial opportunities

What have returns looked like from this valuation level for the S&P? Terrible. Over the last 100 years, returns have averaged negative 7% over a 3-year period at similar valuation levels

When S&P 500 CAPE was below 10x, 3-yr returns of 39%; between 10x and 14x, returns of 34%; between 14x and 18x, returns of 13%; between 18x and 22x, returns of 20%; between 22x and 26x, returns of 22%; between 26-30x, returns of negative 1%; greater than 30x, returns of negative 7% (31x today)

Bubbles appear to be cropping up everywhere

European junk bond yields fall to 2.6%
$450 million da Vinci painting sale shatters previous record
Even depreciating assets are appreciating (composite index of Porsche 911s has increased in value by more than 30% over the last four years)
Bitcoin appreciates over 1,300% in one year
Over $3 trillion invested in ETFs
Donít try to time an avalanche, just get out of the way
Cash may now be one of the only undervalued asset class left
Cashís value comes from two sources: 1) yield and 2) optionality
When just about every asset class is expensive, cash may be one of the only undervalued asset classes left

Cardboard

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I am also really heavy into energy for some of the reasons mentioned by FPA and at the same time very worried about the rest of the markets. Yes, markets including real estate.

Commodities appear to be the only sector where you can find value and Canadian energy being on top. There are also pockets of value elsewhere in small to micro-caps or special situations but, they are getting tough to find and you have to be careful about land mines.

The parabolic chart now very apparent in the DJIA, SPY and Nasdaq combined with very high valuations is quite scary. These events rarely (if ever) end up positive.

So it is problematic for my energy holdings as we need either more time, some sector rotation or both to see revaluation. The best scenario could be a stock market that starts to go sideways but, once fear of losing profits grips the market, that seems very unlikely.

What to do? Hedging the market is costly and does not work unless you are bang on the turning point. How many have been trying to do that on this board since when? 2013???

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Uccmal

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I am also really heavy into energy for some of the reasons mentioned by FPA and at the same time very worried about the rest of the markets. Yes, markets including real estate.

Commodities appear to be the only sector where you can find value and Canadian energy being on top. There are also pockets of value elsewhere in small to micro-caps or special situations but, they are getting tough to find and you have to be careful about land mines.

The parabolic chart now very apparent in the DJIA, SPY and Nasdaq combined with very high valuations is quite scary. These events rarely (if ever) end up positive.

So it is problematic for my energy holdings as we need either more time, some sector rotation or both to see revaluation. The best scenario could be a stock market that starts to go sideways but, once fear of losing profits grips the market, that seems very unlikely.

What to do? Hedging the market is costly and does not work unless you are bang on the turning point. How many have been trying to do that on this board since when? 2013???

Cardboard

That about sums it up.  A market crash or worldwide recession could very well be the result of simultaneous central bank tightening, high oil prices, and increasing labour costs. 

Also, these guys give 5 yrs before EVs will have an impact.  5 years seems reasonable.  After that, demand is likely to drop.  The oil majors of course know this and will invest less in long term large scale projects so it may be a moot point.  But extremely high oil prices, say above 100 per barrel are going to speed the adoption of alternate technologies. 
GARP tending toward value

SharperDingaan

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It's useful to go back to basic economics.

The monetary and fiscal solution to the GR was to flood the economy, with so much new money that it overwhelmed the effects of collapsing asset prices and avoided the wholesale collapse of money banks across the world. It has eventually worked; but until the collective stimulus of the last 10 years can be safely removed, we have too much money chasing too few assets - producing bubbles everywhere. The traditional solution has been to raise interest rates, cautiously at first, then with increasing frequency.

Improving economies consume more oil, no matter where they are; all else equal, existing supply depletes every year. To make up the difference you must either drill for it, drain inventory, or both. Shale production ramps up and depletes quickly, with the cheapest & most accessible fields drilled first. We know that at present, US shale is barely maintaining existing production; to raise production is to drill higher cost fields, requiring a higher WTI price. Hence at even just flat production, an existing o/g firm might expect higher earnings and cash flow going forward.


SD



Cardboard

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Generally, EV's remain too expensive and ICE efficiency keeps on going up. People wanting to make a statement may buy an EV, but for people with a calculator, the choice is obvious.

Moreover, people in general simply don't have money to switch. There is a reason why vehicles are 10 to 12 years old on average. So for EV's to take off, you need a lot of the "rich" people to buy EV's to create a used market and why would these people do other than making a statement? They have plenty of choices and incentives.

So I think it is more 10 years than 5 and likely more 20. You would need a combination of more renewables to generate power, continued higher efficiency, more EV's and hybrids, autonomous vehicles and all of this has to offset population growth AND higher standard of living.

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sbalsam

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Does anybody have a sense of what is behind the huge draws at Cushing? Cushing is currently at 42M barrels compared to 64M barrels on November 3rd.

The Keystone outage began on November 16th and the pipeline resumed operations at reduced pressure on November 27th. I can't find the date of full capacity coming back online. I'm sure that had a major impact but hard to believe that it is still causing such a huge impact over the past two reports of huge draws at Cushing.

Steve

Cardboard

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I don't know why it has dropped so much at Cushing specifically other than this being the hub for WTI and settlement of futures on delivery. Maybe that there is a real short squeeze going on and that the paper market is losing a bit control with buyers demanding physical?

Could be also arbitrage going on with that gap between WTI and Brent remaining enormous at around $6. First it was supposed to be due to the hurricanes, then a pipeline shutdown in Scotland, but, then you see the XL pipeline down and the huge draw that you observed and no change in that gap???

The report published by EIA this morning also showed big draws in almost all categories or a total of 13.3 million barrels of oil/products in 1 week!

This is unheard of for this time of year.

Then we have this crap from EIA that said that Lower 48 States production was down 293,000 bls/d last week, then up 267,000 bls/d this week  :o

What are they trying to do? Truth is that production was down 26,000 bls/d over this 2 week span (if we are still to believe at all their numbers) in what should be a never ending supply glut of shale oil according to the prediction from that agency.

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jmp8822

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Does anybody have a sense of what is behind the huge draws at Cushing? Cushing is currently at 42M barrels compared to 64M barrels on November 3rd.

The Keystone outage began on November 16th and the pipeline resumed operations at reduced pressure on November 27th. I can't find the date of full capacity coming back online. I'm sure that had a major impact but hard to believe that it is still causing such a huge impact over the past two reports of huge draws at Cushing.

Steve

I don't have a good explanation for Cushing draws either, but the total crude inventory draws nationwide are worth watching.  Crude inventories during 2011-2014 in the US swung in the mid-300M barrels range (310M-370M approx) when prices were $100+ per barrel.  If you include some new pipeline fill (permanent working inventory) from recent infrastructure build-outs, anything in the 360M-390M crude barrels inventory range (and lower) could produce substantially higher prices, toward that $100 2011-2014 inventory/price figure.  At the rate of crude draws the last several months, we might be there sooner than consensus expectations.

jmp8822

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Does anybody have a sense of what is behind the huge draws at Cushing? Cushing is currently at 42M barrels compared to 64M barrels on November 3rd.

The Keystone outage began on November 16th and the pipeline resumed operations at reduced pressure on November 27th. I can't find the date of full capacity coming back online. I'm sure that had a major impact but hard to believe that it is still causing such a huge impact over the past two reports of huge draws at Cushing.

Steve

Here is the EIA's take on the matter - FWIW.

https://www.eia.gov/petroleum/weekly/