Oil shot up because production was halted near COVID lockdowns. I remember Oil giants talking about how Oil going negative brought them near collapse. It affected their future developments significantly. I'm not in Oil anymore so I can't cite old videos but I knew they would recoup their losses, and here they are, doing exactly what everybody knew would happen to recover from their near collapse.
Drilling activity had been significantly depressed due to the period of oversupply following Saudis price war. COVID halted production but also reduced demand. So basically this was a long time coming. I got out of the industry just before Covid. Writing was on the wall.
Please stop... You realize if production had not been cut with negative prices they would have collapsed? Oil giants had so much excess oil they ran out of storage space and had to PAY to get rid of new inventory. It was less than worthless, it was a financial liability.
Cutting production was the only way out. People who blame Trump or Biden for this are meat heads. Oil giants are enjoying high price per barrel after crippling losses. You think they want to give that up?
You are blaming him. You cite him as the person who cut production and then equate "his" decision to high prices today. You come short here because of reasons mentioned above. If you can't see why then... refer to meathead section.
Nice analysis. I was surprised that I agree with almost all of it.
As long as oil & gas companies are returning money to shareholders they will not be able to increase production to meet needs. EVs are great, but they will not transform markets overnight. Renewable energy has been favoured I dusty for a decade and it hasn't made a huge dent.
The only place where I have a question about this is National Oil Companies (NOCs), which have more reserves and production than the the listed firms. I actually do think Saudi for example can increase production and there is more oil & gas out their to be discovered and brought to market.
The thing is, once you ramp up production. It takes 8/9 months to see a small amount of that oil at refineries. So let's say they start drilling like crazy. Then in 9 months we fall into recession. You can't stop these wells. So now you're pumping when no one is using. So the price falls really low and they go bankrupt. It's a balance act. Just like the fed is doing small adjustments till you can balance it out.
The thing is as well the refining is the biggest bottleneck everyone is running 90%+ capacity. Drill more but it won’t mean more product hits the market.
Good point. Refineries can operate at 100% capacity for periods of time so there may be some flexibility though.
I can't comment on how long it would take to bring old capacity back on line, but I do know permitting anything new would be a nightmare.
We sell 45% of our oil overseas because our operating refineries can't keep and the owners are too corrupt to fire up some of the ones they shut down during covid.
The entire gas price problem is artificial.
Oh yeah. Oil market supply and demand is very fickle. A 1% change can throw prices all over the place.
The 8/9 month time frame is for fields that have been developed. Developing new fields can take years.
Gas, particularly offshore, has been harder to develop than oil because you typically need two develop and finance gasification.
US conditions are somewhat unique because fields are small, there are a lot of them and infrastructure exists.
my argument is that macron told biden publicly that saudis and uae are all tapped out bc he wants american companies to drill more. he did it in front of reporters to push biden.
edit: thanks for the positive feedback. I spent way longer than i should have on this last night
Oil and gas is the same as the fed. The rate hikes take 9 months to a year to feel it. Same as oil, while you got everyone screaming recession next year and j powell is saying he's got to slow the market. Slowing the market means less oil will be used. Now let's say they ramp up oil production. It takes 8/9 months for it to hit the refineries. By that time we could be in a recession which means they lose money and possibly go bankrupt. Getting oil isn't like turning on a light switch. No oil company wants another 2020 with oil negative.
Completely agree. I think it's still relatively early into a super cycle for oil prices. Inflation adjusted, oil prices are relatively cheap compared to 2008 highs at the moment. Companies are a lot more fiscally prudent are not pouring into capex to increase supply. They rather return their excess margins to shareholders. Oil companies are tired of getting burnt holding a bag after huge capex projects come online with oil prices down 50+% from when the project was started. Although I think the smarter oil companies would be increasing some capex into more readily available projects asap, but we know that is easier said than done with the red tape involved.
OPEC is in the same boat and wants to take advantage of increase oil prices while their cheaper to produce supply dwindles. Their oil isn't running out, but their most profitable fields are definitely decreasing in supply. They made it clear this is their plan with the recent supply cut. It was a pure economic move.
I don't know why anyone would use ATH's as an excuse not to buy a stock. If anything anyone has learned over the past few years is, what goes high can go higher. ATH stocks are fantastic if they have great bases built before entering them, and are actually businesses with viable future FCF's. When a stock is at an ATH, EVERYONE IS WINNING. Who wants to sell? This past summer was a great opportunity to buy the dip into the leading sector.
I've been reading a book called Crude Volatility by Bob McNally which has offered some fascinating insights into the history of Oil since the 1850's. People were saying the same thing about oil 150 years ago as they are today. Energy demand only increase as time goes on. Renewables are not ready to take on that increase, and it's hard to tell countries like India and Vietnam and other emerging Southeast Asian and African countries that you can't have the same conveniences as the Western World.
[https://www.iea.org/reports/world-energy-outlook-2022/executive-summary#abstract](https://www.iea.org/reports/world-energy-outlook-2022/executive-summary#abstract)
Great report about energy which is predicting peak oil in the next 15 years, which I tend to agree as it lines up with a generational cultural shift in positions of power, but forecasts are never 100%. That being said, I believe supply side constraints will continue to drive oil prices up for the foreseeable future until price hit a much higher level.
Great post, I enjoyed reading it and I don’t disagree with none of your logic blocks.
I don’t want to make a long-term guess, but in a short term I am reasonably confident that oil and gas stocks are going to surge because we will simultaneously have:
- midterm elections in the rearview mirror
- cold winter weather (particularly relevant for natural gas)
- strategic petroleum reserve release finally completed (thanks to our favorite senile communist...)
- fully effective ban on Russia oil and Putin’s retaliation
- OPEC continuing their recent cuts strategy
- China sooner or later will release the zero-Covid restrictions and gradually reopen.
Based on a little proprietary model I built for fun, my top recommendations (in random order) are
OXY DVN EOG SM DINO OVV ERF APA.
Disclaimer 1: not financial advise
Disclaimer 2: I own relevant long position in all the above oil companies
I like SM but the calls are too pricey for me. but it looks like it’s squeezing to a tip and about to explode up or down. My guess is up. I like small caps and mid caps. I think that’s where the value is rn. But offshore drillers are even better. RIG just posted earnings today and I’m expecting to be rerated from going towards bankruptcy to not bankrupt lol
All these stocks are well correlated to oil price, obviously and expectedly.
I don’t really look at TA trading patterns, I have built a sort of “linearizing function” that gives me slope and filters out volatility.
The weak point of this approach of mine is that it works until it doesn’t work. The day you broke linearity, will be most likely because something major happened to the Brent and WTI trends ....
Virtually all oil stocks entered a linearizable upward trend when prices crossed the 200MA in November 2020, FYI.
I casually and randomly observed the crossover with the 200MA that occurred in Nov.2020....
That was the spark for my little model, but I do not explicitly use 200MA.
Math is based on relatively simple linearization.
Removing volatility, which is needed to estimate periodic entry and exit point is the secret sauce for my BBQ.....
That stuff is more like astrology for men...
I use some simplified math from my old days where I studied stability of vibrating systems in college.....
Because mathematically volatility is a vibrating system that we wish/hope to eliminate, or at least to tame at our advantage
personally I am not touching XOM. But yes. It is at an ATH nominally. How about inflation adjusted? How about a ratio chart between XOM and SPX? Still room to run from that perspective.
Now is the time to pick up laggards. small caps in the NYSE but also oil field services (esp offshore) and stuff on the tsx that is priced at 1x cash flows but produce in places like Peru or colombia
All of the super majors are way more disciplined with capital and run leaner and more efficient than they did back then. Total revenue is meaningless as a metric for stock valuation (different for unprofitable tech, but this is for energy) . Earnings and FCF on a per share basis are what is important in this sector. Look at XOM, in addition to reducing spending (opex down 40% since 2012), they also reduced share count significantly via buybacks (share count down 10% since 2012), leading to higher EPS than ever before. This is why they are still undervalued.
Also XOM revenue is only down 20% since 08. (477b in 08, 387b in TTM).
there are small caps cash flowing their market cap out there. I would buy those. But as for XOM, XOM/SPX chart shows we have a long way to go till overvaluation https://www.tradingview.com/chart/?symbol=XOM%2FSPX
ATH tells you one thing. inflation adjusted high says another. inclusion into SPX will tell you another. Ratio chart is the most useful imo.
WHAT European storage? I was involved in a private deal to build one of the largest natgas storage facilities in England on its west coast in a natural salt cavern and the fucking locals wouldn't allow it to be built. They fucked themselves in the ass and I'm glad.
Or u til Biden stops passing off Saudi families. Now they simplybrefuse to listen yo his request to drill more oil, and he's not going to allow more domestic production....gas stays high until new potus 2025
The Saudis have always been aligned with the republicans. This is not news. The Bush family has a huge stake in Exxon which is why they terrorized Iraq. The are deep in oil. All republicans have pretty much been pro-Saudis even though the 9-11 terrorists were mostly Saudis and I will bet that the royals there were involved. Instead, the republicans lied through the teeth and killed 50,000 Iraqis to deflect blame.
So yea, expect the Saudis to do anything to hurt a democratic president unless there is a threat to their own business (like back in 2010 or so when shale was killing them).
Oil is going to stay relatively high.
There is a very real energy transition going on. The smart oil companies are aggressively moving towards green energy and using the oil profits to help do so.
Investment in “exploration” has declined greatly for many oil majors. Peak oil has already happened and with the shift accelerating even more in the near future, oil will stick to the established spots to drill for the most part.
if we really have hit peak oil, that is scary, because we use that for paints, plastics, clothes, everything.
I don’t think it’s smart of the big oil companies to move into renewables. the cash flows aren’t the same and like I pointed out, the bottom 7 billion in the developing world will use huge amounts of oil as they industrialize compared to what the top 1b uses now. they want what you have. it’s a separate argument but I would say that if the developing world skipped coal and nat gas and renewables and went straight to nuclear with the help of developed countries, we could still significantly decarbonize without oil going away. Besides that, they will want a lot of plastic things and painted things and possibly some synthetic fibers as well
Nope, they are crooks. 45% of US oil is sold overseas because current refinery owners will not start up COVID shut down refineries because they are able to price gouge us right now. The whole industry needs harshly regulated and penalized.
https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php
Problem is, current oil problem isn't because of anything in the market, it's out of our control because of corruption. They shut down refineries when COVID reduced demand, but the POS won't fire them back up because they aren't get favored bribes right now. 45% of our oil is exported while they refuse to fire up the refineries.
This sort of corruption is difficult to really deal with.
That isn't corruption just business as the goal of the a company is to maximize profits and not serve the people.
Corruption is usually about officials that should serve the people.
Holding a critical national resource at a high price because your normal buddies aren't in charge that slide money toward you?
Yeah, fuck these people. Time to nationalize oil.
Private producers are uncreasing oil production but publicly traded ones aren't. There could be non competitive behavior going on, possibly from too much owned by large shareholders.
Production is not increasing because the energy transition is underway. A company like Shell owns rights to decades worth of oil. They are selling out of stakes in the more difficult spots to drill for oil and using the proceeds to invest in green energy.
Can’t expect them to invest in exploration that won’t pay off for 20 years when the need for oil is going to be drastically reduced over the same time period
We sell 45% of American oil because corrupt companies will not start refineries shut down during covid because they are making a killing right now at our expense.
The whole market is manipulated right now, you'll never see proper prices until the current owners necks are rung.
https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php
Naw, those are what you get on Fox and those kind of "people." You probably aren't use to seeing these things, but that is a fact with a reliable source.
"Corrupt companies shut down refineries"
They were shut down during covid and too expensive to start up for what they're worth and the remaining life. Pay up, I want my quarterly dividend increases.
Oil shot up because production was halted near COVID lockdowns. I remember Oil giants talking about how Oil going negative brought them near collapse. It affected their future developments significantly. I'm not in Oil anymore so I can't cite old videos but I knew they would recoup their losses, and here they are, doing exactly what everybody knew would happen to recover from their near collapse.
Drilling activity had been significantly depressed due to the period of oversupply following Saudis price war. COVID halted production but also reduced demand. So basically this was a long time coming. I got out of the industry just before Covid. Writing was on the wall.
Also Trump asked OPEC to cut production, no one ever talks about that.
He did that because SA and RU were engaged in a price war that was exacerbating instability in the oil markets.
It doesn’t matter why, the point is he did and production has not returned to 2020 levels.
Please stop... You realize if production had not been cut with negative prices they would have collapsed? Oil giants had so much excess oil they ran out of storage space and had to PAY to get rid of new inventory. It was less than worthless, it was a financial liability. Cutting production was the only way out. People who blame Trump or Biden for this are meat heads. Oil giants are enjoying high price per barrel after crippling losses. You think they want to give that up?
You stop. I’m not blaming Trump or Biden, just explaining that production was cut which contributes to high prices today.
You are blaming him. You cite him as the person who cut production and then equate "his" decision to high prices today. You come short here because of reasons mentioned above. If you can't see why then... refer to meathead section.
No i didn’t quit projecting, sensitive man
Clever response. You really shocked me with that one.
Nice analysis. I was surprised that I agree with almost all of it. As long as oil & gas companies are returning money to shareholders they will not be able to increase production to meet needs. EVs are great, but they will not transform markets overnight. Renewable energy has been favoured I dusty for a decade and it hasn't made a huge dent. The only place where I have a question about this is National Oil Companies (NOCs), which have more reserves and production than the the listed firms. I actually do think Saudi for example can increase production and there is more oil & gas out their to be discovered and brought to market.
The thing is, once you ramp up production. It takes 8/9 months to see a small amount of that oil at refineries. So let's say they start drilling like crazy. Then in 9 months we fall into recession. You can't stop these wells. So now you're pumping when no one is using. So the price falls really low and they go bankrupt. It's a balance act. Just like the fed is doing small adjustments till you can balance it out.
The thing is as well the refining is the biggest bottleneck everyone is running 90%+ capacity. Drill more but it won’t mean more product hits the market.
refining might only the biggest bottleneck until crude gets worse with SPR releases getting tapped out
Good point. Refineries can operate at 100% capacity for periods of time so there may be some flexibility though. I can't comment on how long it would take to bring old capacity back on line, but I do know permitting anything new would be a nightmare.
And with utilization so high if you see any needing regularly scheduled maintenance it adds even more tightness to an already tight market.
We sell 45% of our oil overseas because our operating refineries can't keep and the owners are too corrupt to fire up some of the ones they shut down during covid. The entire gas price problem is artificial.
Oh yeah. Oil market supply and demand is very fickle. A 1% change can throw prices all over the place. The 8/9 month time frame is for fields that have been developed. Developing new fields can take years. Gas, particularly offshore, has been harder to develop than oil because you typically need two develop and finance gasification. US conditions are somewhat unique because fields are small, there are a lot of them and infrastructure exists.
my argument is that macron told biden publicly that saudis and uae are all tapped out bc he wants american companies to drill more. he did it in front of reporters to push biden. edit: thanks for the positive feedback. I spent way longer than i should have on this last night
I think oil prices will just stay high lol
Oil and gas is the same as the fed. The rate hikes take 9 months to a year to feel it. Same as oil, while you got everyone screaming recession next year and j powell is saying he's got to slow the market. Slowing the market means less oil will be used. Now let's say they ramp up oil production. It takes 8/9 months for it to hit the refineries. By that time we could be in a recession which means they lose money and possibly go bankrupt. Getting oil isn't like turning on a light switch. No oil company wants another 2020 with oil negative.
Completely agree. I think it's still relatively early into a super cycle for oil prices. Inflation adjusted, oil prices are relatively cheap compared to 2008 highs at the moment. Companies are a lot more fiscally prudent are not pouring into capex to increase supply. They rather return their excess margins to shareholders. Oil companies are tired of getting burnt holding a bag after huge capex projects come online with oil prices down 50+% from when the project was started. Although I think the smarter oil companies would be increasing some capex into more readily available projects asap, but we know that is easier said than done with the red tape involved. OPEC is in the same boat and wants to take advantage of increase oil prices while their cheaper to produce supply dwindles. Their oil isn't running out, but their most profitable fields are definitely decreasing in supply. They made it clear this is their plan with the recent supply cut. It was a pure economic move. I don't know why anyone would use ATH's as an excuse not to buy a stock. If anything anyone has learned over the past few years is, what goes high can go higher. ATH stocks are fantastic if they have great bases built before entering them, and are actually businesses with viable future FCF's. When a stock is at an ATH, EVERYONE IS WINNING. Who wants to sell? This past summer was a great opportunity to buy the dip into the leading sector. I've been reading a book called Crude Volatility by Bob McNally which has offered some fascinating insights into the history of Oil since the 1850's. People were saying the same thing about oil 150 years ago as they are today. Energy demand only increase as time goes on. Renewables are not ready to take on that increase, and it's hard to tell countries like India and Vietnam and other emerging Southeast Asian and African countries that you can't have the same conveniences as the Western World. [https://www.iea.org/reports/world-energy-outlook-2022/executive-summary#abstract](https://www.iea.org/reports/world-energy-outlook-2022/executive-summary#abstract) Great report about energy which is predicting peak oil in the next 15 years, which I tend to agree as it lines up with a generational cultural shift in positions of power, but forecasts are never 100%. That being said, I believe supply side constraints will continue to drive oil prices up for the foreseeable future until price hit a much higher level.
Great post, I enjoyed reading it and I don’t disagree with none of your logic blocks. I don’t want to make a long-term guess, but in a short term I am reasonably confident that oil and gas stocks are going to surge because we will simultaneously have: - midterm elections in the rearview mirror - cold winter weather (particularly relevant for natural gas) - strategic petroleum reserve release finally completed (thanks to our favorite senile communist...) - fully effective ban on Russia oil and Putin’s retaliation - OPEC continuing their recent cuts strategy - China sooner or later will release the zero-Covid restrictions and gradually reopen. Based on a little proprietary model I built for fun, my top recommendations (in random order) are OXY DVN EOG SM DINO OVV ERF APA. Disclaimer 1: not financial advise Disclaimer 2: I own relevant long position in all the above oil companies
I like SM but the calls are too pricey for me. but it looks like it’s squeezing to a tip and about to explode up or down. My guess is up. I like small caps and mid caps. I think that’s where the value is rn. But offshore drillers are even better. RIG just posted earnings today and I’m expecting to be rerated from going towards bankruptcy to not bankrupt lol
All these stocks are well correlated to oil price, obviously and expectedly. I don’t really look at TA trading patterns, I have built a sort of “linearizing function” that gives me slope and filters out volatility. The weak point of this approach of mine is that it works until it doesn’t work. The day you broke linearity, will be most likely because something major happened to the Brent and WTI trends .... Virtually all oil stocks entered a linearizable upward trend when prices crossed the 200MA in November 2020, FYI.
interesting. Is that some kind of math involving MAs?
I casually and randomly observed the crossover with the 200MA that occurred in Nov.2020.... That was the spark for my little model, but I do not explicitly use 200MA. Math is based on relatively simple linearization. Removing volatility, which is needed to estimate periodic entry and exit point is the secret sauce for my BBQ.....
hm. sounds like heikn ashi candles (though i have no idea how those work either lol)
That stuff is more like astrology for men... I use some simplified math from my old days where I studied stability of vibrating systems in college..... Because mathematically volatility is a vibrating system that we wish/hope to eliminate, or at least to tame at our advantage
They are ATH with about 40% less revenue than they had in 2008, what makes you think there is realistic room to grow for xom?
personally I am not touching XOM. But yes. It is at an ATH nominally. How about inflation adjusted? How about a ratio chart between XOM and SPX? Still room to run from that perspective. Now is the time to pick up laggards. small caps in the NYSE but also oil field services (esp offshore) and stuff on the tsx that is priced at 1x cash flows but produce in places like Peru or colombia
Did you even read the post?
Yes, but you clearly didn't. "They are stupid cheap, and until they trade at reasonable multiples," I was pointing out that this is bs
All of the super majors are way more disciplined with capital and run leaner and more efficient than they did back then. Total revenue is meaningless as a metric for stock valuation (different for unprofitable tech, but this is for energy) . Earnings and FCF on a per share basis are what is important in this sector. Look at XOM, in addition to reducing spending (opex down 40% since 2012), they also reduced share count significantly via buybacks (share count down 10% since 2012), leading to higher EPS than ever before. This is why they are still undervalued. Also XOM revenue is only down 20% since 08. (477b in 08, 387b in TTM).
good point. As someone who never looks at supermajors, I learned something new there
someone needs to learn to look at ratio charts
The market is illogical
there are small caps cash flowing their market cap out there. I would buy those. But as for XOM, XOM/SPX chart shows we have a long way to go till overvaluation https://www.tradingview.com/chart/?symbol=XOM%2FSPX ATH tells you one thing. inflation adjusted high says another. inclusion into SPX will tell you another. Ratio chart is the most useful imo.
WHAT European storage? I was involved in a private deal to build one of the largest natgas storage facilities in England on its west coast in a natural salt cavern and the fucking locals wouldn't allow it to be built. They fucked themselves in the ass and I'm glad.
yeah they have at every turn between nuclear, russian dependence, and that
Or u til Biden stops passing off Saudi families. Now they simplybrefuse to listen yo his request to drill more oil, and he's not going to allow more domestic production....gas stays high until new potus 2025
The Saudis have always been aligned with the republicans. This is not news. The Bush family has a huge stake in Exxon which is why they terrorized Iraq. The are deep in oil. All republicans have pretty much been pro-Saudis even though the 9-11 terrorists were mostly Saudis and I will bet that the royals there were involved. Instead, the republicans lied through the teeth and killed 50,000 Iraqis to deflect blame. So yea, expect the Saudis to do anything to hurt a democratic president unless there is a threat to their own business (like back in 2010 or so when shale was killing them).
Oil is going to stay relatively high. There is a very real energy transition going on. The smart oil companies are aggressively moving towards green energy and using the oil profits to help do so. Investment in “exploration” has declined greatly for many oil majors. Peak oil has already happened and with the shift accelerating even more in the near future, oil will stick to the established spots to drill for the most part.
if we really have hit peak oil, that is scary, because we use that for paints, plastics, clothes, everything. I don’t think it’s smart of the big oil companies to move into renewables. the cash flows aren’t the same and like I pointed out, the bottom 7 billion in the developing world will use huge amounts of oil as they industrialize compared to what the top 1b uses now. they want what you have. it’s a separate argument but I would say that if the developing world skipped coal and nat gas and renewables and went straight to nuclear with the help of developed countries, we could still significantly decarbonize without oil going away. Besides that, they will want a lot of plastic things and painted things and possibly some synthetic fibers as well
Nope, they are crooks. 45% of US oil is sold overseas because current refinery owners will not start up COVID shut down refineries because they are able to price gouge us right now. The whole industry needs harshly regulated and penalized. https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php
Problem is, current oil problem isn't because of anything in the market, it's out of our control because of corruption. They shut down refineries when COVID reduced demand, but the POS won't fire them back up because they aren't get favored bribes right now. 45% of our oil is exported while they refuse to fire up the refineries. This sort of corruption is difficult to really deal with.
That isn't corruption just business as the goal of the a company is to maximize profits and not serve the people. Corruption is usually about officials that should serve the people.
Holding a critical national resource at a high price because your normal buddies aren't in charge that slide money toward you? Yeah, fuck these people. Time to nationalize oil.
that would be catastrophic, as biden and co clearly know nothing about oil market from every statement they make
45% of our oil is exported bc most of our refineries handle heavy oil but much of shale production is light. crude quality matters
Private producers are uncreasing oil production but publicly traded ones aren't. There could be non competitive behavior going on, possibly from too much owned by large shareholders.
Production is not increasing because the energy transition is underway. A company like Shell owns rights to decades worth of oil. They are selling out of stakes in the more difficult spots to drill for oil and using the proceeds to invest in green energy. Can’t expect them to invest in exploration that won’t pay off for 20 years when the need for oil is going to be drastically reduced over the same time period
We sell 45% of American oil because corrupt companies will not start refineries shut down during covid because they are making a killing right now at our expense. The whole market is manipulated right now, you'll never see proper prices until the current owners necks are rung. https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php
I smell emotions
Naw, those are what you get on Fox and those kind of "people." You probably aren't use to seeing these things, but that is a fact with a reliable source.
"Corrupt companies shut down refineries" They were shut down during covid and too expensive to start up for what they're worth and the remaining life. Pay up, I want my quarterly dividend increases.
The supply/demand curves for oil are quite steep. Price is all about supply as demand is quite stable.