1/Recent lows in oil and gas equities have predictably triggered the usual flurry of articles about value or mean-reverting investors sniffing around for bargains. But I see no reason to conclude Oil & Gas is anything other now than a long-term value trap.
2/ Other than the usual price oscillations I'm not sure what Oil and Gas investors are looking for now. Another oil cycle? It's obvious the last oil cycle is well behind us now. The leading edge proxy, $OIH, never sustainably recovered after the last big oil decline. Dead sector.
3/ As 2019 comes to a close, once again we see the main forecasting agencies like EIA and IEA having spent much of the year downward revising their demand forecasts. That's getting old, frankly. IEA's STEO today also revised down 2017 + 2018 demand levels--not hugely. But, still.
4/ As usual, the same tired heuristics are trotted out by those clinging to belief Oil and Gas is a still cyclical business: rig counts down, bankrupticies, and low prices--all marshaled to forecast of tighter supply. Oops: see the forecast for US supply growth in 2020. Boink.
5/ It's the same problem we've seen for years now: industry has itself up to ramming speed of supply growth into face of a weakening rate of annual demand growth. And there's another area of supply: OPEC spare capacity. Yeah, the old paradox of "cuts." eia.gov/outlooks/steo/…
6/ As I explained in my eBook "Oil Fall" there is no good news here for anyone. The O+G industry now faces unyielding economic pressure, but, the long-tail of O+G dependency does not suggest any dramatic global decline is imminent in demand. It's going to be another coal story.
7/ In one of BP's scenarios global oil demand makes no progress after 2025. I'd probably bring that forward 2-3 years, and stick w/ my view demand growth could peak early this coming decade. But again, coal is instructive: peaks in 2013, then hangs on a plateau for 6 yrs running.
8/ A plausible scenario for oil in the coming decade is a peak, then a long ten year plateau. A slow burn that destroys myriad O+G companies, serially hurts value investors, and finally resolves in the long-expected decline as the S curve of transport electrification activates.
9/ Again, because the fracking learning curve is now *behind us* the US industry is set to again massively increase production next year to above 13 mbpd, without any notable help from the OSX. ($OIH). At some point you just have to face up.
eia.gov/outlooks/steo/
eia.gov/outlooks/steo/
10/ It's instructive to watch IEA and EIA kick off each year with wildly high demand forecasts and then spend the next 12 months busily revising. Both started 2019 with a 1.4 mbpd growth call. EIA is down to +0.75 mbpd, and IEA stubbornly clinging to 1.0. eia.gov/outlooks/steo/…
11/ They're back at it of course. For 2020, IEA is calling for a 1.2 mbpd increase and EIA is at 1.4 mbpd. I'd argue those are even lower quality outlooks than their 1.4 made for this year (which will come close to being cut in half.) ICE vs EV amidst auto sector decline deepens.
12/ So if you're heading into value traps like $XOP and $OIH, here's my question: let's say EIA and IEA are right next year about demand...where, exactly, is the problem in the supply-growth pipeline--especially given OPEC spare capacity--that would tighten up this market?
Coda: the little guys get hurt first. Then it starts to hit the big ones. It's gonna be like this from here on out. Good luck, bottom fishers. #HappyNewYear #2020
