It is clear to me that one cycle for oil is over. Let’s call that the “easy money” phase. The next phase for a world with no demand growth is going to be very interesting.
by Briton Ryle
Nearly a month ago, on Monday, September 14, we awoke to news that a fleet of drones had attacked a critical part of the Saudi oil infrastructure.
Bloomberg columnist Liam Denning wrote:
We’re about to find out just how laid back the oil market really is. It has shrugged off sanctions on Iran, exploding tankers and drones getting shot down over the Strait of Hormuz. But this weekend’s strike against Saudi Arabia’s Abqaiq processing facility – perhaps the single most important piece of oil infrastructure on the planet – is of a different order.
Saudi Arabia said the attack affected 5.7 million barrels a day of output, or roughly half their production.
WTI crude prices were right around $57 a barrel before the attack. That Monday, oil gapped up $5 to around $62, as it was estimated that it would take six months or so to get Saudi Arabia back to full production.
It’s been all downhill for oil prices since, to $52.48 at Friday’s close. Mr. Denning wanted to know how laid back the oil market is? Apparently the answer is: very.
So you can make fun of Greta Thunberg’s passionate speeches about climate change all you want. Go ahead, put your money where your mouth is and take a big bite of that sweet 5% dividend on Exxon-Mobil (NYSE: XOM) stock.
I’m here to tell you that the Twitter-fication of the world is changing the investment landscape faster than ever, and we all better be paying attention.
Now, when I say “Twitter-fication,” I’m talking about how technology(NYSEARCA:XLK) has connected people around the world and given us all a voice in the biggest conversations that define our world at this time.
One day an intern complains that CBS anchor Charlie Rose harassed her. The next day several former colleagues report that yes, he would routinely answer the door completely naked. The day after that, he’s gone.
There is no place to hide anymore. Oh, they still try, but big money and the entrenched elite do not get to call the shots anymore. Otherwise we’d probably be watching the WeWork IPO this week. Instead, founder, CEO, and Chairman Adam Neumann is out on his ear, and we could be looking at the fastest unicorn-to-bankruptcy in history.
No Place to Hide
So what does all this have to do with oil? After all, it’s not like we’ve suddenly stopped using plastic and driving cars with internal combustion engines on smoothly paved roads.
At this point it’s not just about supply and demand anymore.
We’re now talking about the actual value of oil as an asset. And we’re also talking about oil as a liability. Sure, you can still make money if you own oil. But anybody considering owning oil wants to know what their carbon liability is going to be in the future. No one knows the answer to that. And big unanswered questions like that are often all it takes for an investor to say, “Next.”
That’s why, when oil owners saw that price spike to $62, they all said the same thing: sell! Sovereign wealth funds are selling. Pension funds are selling. Endowments are selling
Let me ask you this: If nobody wants to invest in oil anymore, how much new oil is going to come on line?
Or maybe let me put it this way: If investors only want to invest in renewable/green energy production, how much will come on line?
It’s not a coincidence that Warren Buffett owns a ton of renewable energy(NYSEARCA:XLE). Nor is it out of the blue that he’s been selling off his holdings in oil refiner Phillips 66. And I’ll tell you right now: Buffett isn’t listening to Twitter or a Swedish teenager. He’s making investments based on reasonable expectations of future returns.
Risk Happens Fast
They say the stock market takes the stairs up but the elevator down. Bull markets grind higher as more and more investors and businesses come around to the trends that are driving prices higher.
For instance, the cloud has been a growth story for at least 10 years. But Microsoft (NASDAQ: MSFT) didn’t break over $50 until ~2015. Today it’s nearly $140.
But when it all goes bad, it’s like somebody flipped a switch. And it’s because investment cycles come to an end.
I will never forget, back in 2014, my man Christian DeHaemer told me he thought oil could fall to $40. I told him he was nuts because the world needs oil and most new oil was unconventional and took at least $60 a barrel just to develop. I argued that prices had to stay at least $70. Wrong.
The best cure for high prices is high prices. And oil prices got cut in half in six months.
The oversupply risk for oil remains. The growth of electric vehicle sales (especially in China) and higher MPG requirements have caused demand growth to pretty much stagnate. We’ve added liability risk. And we should probably add divestment risk. Because starting with the Saudis, everybody wants to sell…
It seems to me there will come a time when the pessimism on oil (NYSEARCA:USO)will go too far. The lack of investment in new production will eventually create a supply imbalance. To this point, U.S. shale companies have made up the difference. They’ve added 3 million barrels a day in the last few years.
Problem is, most U.S. shale companies are cash flow negative. They are taking on debt as they drill and pay off old debt. That’s a shell game that isn’t going to last…
It is clear to me that one cycle for oil is over. Let’s call that the “easy money” phase. The next phase for a world with no demand growth is going to be very interesting. Maybe that 5% Exxon will actually look pretty good in a year or two?
Sit back and be patient. These things always take longer than expected.