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The Running of the Oil Bulls.....

Bogleheads • View forum - Investing - Theory, News & General - www.bogleheads.org
I'm calling it, a 'top' for the oil business (extraction and refining) especially in the US, but also globally.

There might be some little fluctuations, but it is clear at this point that this entire US industry is going down!

Of course, the evidence is manifold....

Oil Major Economics:

--New oil discovery is falling off a cliff. While there has been a long down-trend on this, it is clear that the majors are cutting their exploration efforts/budgets....they are doing that b/c they know that by the time those new discoveries can be developed, they will already be unprofitable.

--Pending major projects in arctic oil and offshore platforms have been cancelled since 2015, and no/few projects have initiated. The last projects started (pre-2015) came on line this year. Not a lot of new major projects in the pipeline anywhere. I think we can assume that the majors (which have plenty of cash and are able to raise funds as needed) are choosing NOT to develop new projects, b/c they are projecting that they will not (or may not) be profitable over their lifetimes.

Fracker Economics:

--What's that? The frackers are booming? Well, the two big shale plays (Bakken and Eagle Ford) are showing signs of exhaustion, with all the best sites in their cores already densely covered. Most other plays are smaller, older, and even more played out. The play that is driving the excitement in 2017 is the Permian (next to Eagle Ford) which is unique...tighter than a conventional play (and thus not tapped out decades ago) but much easier than any other shale play...so the new extraction tech is just the ticket. That's it, the Permian. One play that is in development and producing well in one corner of Texas, close to refineries. The press talks about 'the US frackers coming back'..in fact the frackers nationwide are in permanent decline, and this one small region is moving the national needle in the positive direction.

--Fracker hedging. When OPEC cut their output and the oil price creeped just above $50, all the frackers raced to lock in the $50 future price for their next 6-18 mos of production. Hardly a vote of confidence that the price would stay there for long or shoot the moon upwards. Of course, these companies are risk averse (they need to survive even a brief downturn, and close to 50% of their brethren have gone belly up since 2015). But given their small profit margins at $50, IMO a sign of desperation.

Price Signals and OPEC:

--OPEC announces a continuation of their current 6 mos production cut for 9 more months....and the price of oil dives 4% in hours. I guess the speculators concluded that a larger cut was both needed AND in the works to support oil prices for the next 6-9 mos...and didn't get their wish. To me, this is evidence that the market maker's CW is that the 'glut' blamed for low oil prices (since 2014...2.5 years now and counting) will not be cleared anytime soon....as in maybe 2018 sometime, or later?

DISRUPTION:

Of course, this is not about regulation (US, UN or otherwise), or AGW (a forbidden topic here that I will NOT discuss). It is about the coming tech disruption of the light transportation system (cars) that consumes most of the world's oil production AND that the oil industries economics were always predicated on the continuous growth of that light transportation (cars) model around the world. When an industry sees their disruption coming....they don't issue a press release....but they shift or curtail their investments in future projects, as noted damningly above.

In the space of a few years, the oil majors have gone from forecasting perpetual growth in global oil demand (in their glossy annual 'World Energy' reports) to foreseeing a **peak in global oil demand**, and are now debating when the peak will occur.

--Royal Dutch Shell CEO Ben van Beurden says oil demand will peak in the late 2020s.

--Shell CFO Simon Henry expects peak demand in five years.

Electric Vehicles:

What will cause the disruption?....electric vehicles or EVs. Despite claims to the contrary, sales of cars that run off grid electricity have continued their exponential sales growth in the US, and even more so overseas. News:

--The US and EU both have over >500k EVs on the road, China is >800k. These are mostly low-range 'first generation' models.

--The second generation is coming: affordable >200 mile range EVs....GM Bolt goes nationwide July '17. Tesla Model 3 at the end of the year and Nissan LEAF gen 2 in March 2018.

--Cost of ownership of low range EVs has always been lower than ICE cars...with Gen 2 long range EVs have lower cost of ownership.

--More than a third of Americans tell surveys that they will consider EVs for their next car purchase.

--EVERY major car maker is planning on shipping multiple EV models asap.

--The CEO of Ford was just ditched because his plan for dealing with the coming disruption wasn't aggressive enough.

Cost projections make it clear that long-range EVs will soon be cheaper than any comparable gasoline car....and the penny has dropped at the oil cos. Cheaper means that if the developing world buys a lot of cars in the future, they won't run on gas....there goes their decades of projected future demand...poof. Falling demand means that the most expensive producers go belly up first. Where are those...North America...in order of cost, Alberta tar sands, US frackers, and US offshore... There will still be global oil production and use for decades more, but falling demand suggests that prices will be held low, and all production will be low-cost. low-margin and overseas. Kinda like most other extractive industries.

The guru of energy and transportation is Tony Seba. A new report is availble at:

[NB: I know video content is suspect here...I will attest that it is free of forbidden topics including PO, AGW, politics, future policy, etc. Rather it consists of a discussion of future price, markets and competition within the transportation and energy industries.]

One energy analyst says:

"If Tony Seba is correct, the Texas and Alberta economies just took a metaphorical bullet to the head"

So I think the TIME IS UP....

On the one side the 'global glut' is suppressing oil prices into 2018 or perhaps even farther. On the other EVs have stolen the oil majors' future. The speculation from energy analysts has now become open statements regarding oil demand peaks from oil company execs!

How much longer can the oil majors keep their investors comfortable and happy and secure before the mom and pop CW changes?
Date: May 27, 2017   


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