Is a Future of $100 Oil Merely a Mirage?
Anticipating a return to triple-digit oil prices in the immediate future is akin to waiting for rain in a drought-stricken desert.
Recent reports from Saudi Arabia, the global crude kingpin, have set aside aspirations for a $100 price tag as they make ready to boost crude production come December. This planned increase is set against a backdrop of existing oversupply when compared to demand. Current West Texas Intermediate Crude market figures position the commodity in the upper-$60s as of now.
With this prevailing scenario, does the oil industry present a toxic environment for investors? Is there a glimmer of hope amidst the darkness, waiting to be uncovered?
Indeed, a contrarian perspective exists — the question that remains is not if the turnaround will happen, but when, and how soon one should seize the impending opportunity.
Deciphering the True Demand for Oil
Assessing the trajectory of oil for the remainder of this year unveils a simple truth: the continuous decline in prices since nearly cresting $94 per barrel last autumn stems from an imbalance of abundant supply outstripping meager demand.
Source: StockCharts.com
Looming additions to supply by OPEC in the face of this disequilibrium mean that upward price movements are contingent upon a substantial surge in demand. But is there evidence to support an imminent surge through the end of the year?
Unpacking China’s Influence
China’s recent stimulus efforts far outstrip past endeavors, signifying a monumental push toward revival for its economic engine.
As highlighted in reports from Bloomberg and Reuters, China’s central bank has orchestrated a series of measures aimed at resuscitating economic growth, showing a deep concern over its current lull. Will China’s actions kindle a new phase of prosperity for the oil market?
Discrepancies in energy demand forecasts by OPEC and the IEA add complexity to this evaluation, with historical data reflecting a middle-ground outcome between their projections. The current forecasts for Q4, however, diverge dramatically, pointing to an unprecedented discrepancy in anticipated oil demand.
Navigating the Contrarian Path
Currently, traders exhibit an overwhelmingly bearish stance on oil, marking the most pessimistic sentiment in over a decade.
Unveiling the Contradictory Path of Oil Market Sentiment
Source: Global Markets Investor @GlobalMktObserv, Bloomberg
It’s intriguing. The recent Bloomberg Markets Live Pulse (BMLP) survey waved a caution flag on crude oil – labeling it as the “best to avoid for the rest of the year.”
Source: Bloomberg MLIV Pulse survey
However, this seemingly dire forecast might hold a silver lining, beckoning brighter skies ahead – the question isn’t “if” but “how soon?”
Human nature dances to a peculiar tune – exuding exuberance or dread during the most inopportune moments. When a crowd aligns in one direction, anticipating a singular outcome, the path to that destination often withers, lacking the necessary driving force from dissenting voices.
In a recent revelation, Brett Eversole, steward of Daily Wealth under the wing of Stansberry Research, unveiled a pattern correlating extreme pessimism with bullish returns. By juxtaposing the Commitment of Traders (COT) report – a weekly financial diary of futures traders’ sentiments – with the subsequent S&P returns, Brett uncovered a compelling narrative.
Source: Brett Eversole / Daily Wealth / Stansberry Research
Per Brett’s assessment, futures traders’ current disheartenment with oil echoes levels not witnessed since June 2023 and as far back as 2010.
Delving into historical data on oil’s price trajectory post such despondent COT stages showcased an average 12-month surge of 62%. And peering even further, prolonged rallies exceeding a year led to staggering mean upticks of 96%, while briefer upticks yielded a respectable 39% average gain.
The verdict is cast – not just a signal but a bold, luminous green beacon beckoning towards an oil venture.
However, harmony eludes this symphony of optimism and foreboding. But fret not, clarity awaits us around the corner. Let’s pivot our gaze towards the horizon.
Deciphering the Medium/Long-Term Prospects for Oil
The fulcrum of oil prices pivots on the waltz between supply and demand. So, what melodies do we hear echoing from this edifice?
Today’s chorus resounds with a surplus of supply, dwarfing demand, yet this sonnet is ephemeral.
Earlier this year, a symphony from CNBC rang loud:
The oil arena braces for a shortage by 2025’s curtain call – a consequence of mankind’s sluggish replacement of dwindling crude reserves as Occidental CEO Vicki Hollub vocalized to CNBC. She unveiled a jaw-dropping statistic – a mere 50% of current oil derives from 20th-century discoveries. A dire symphony unfolds as reserves tumble at a rate outpacing rejuvenation efforts, dimming the spotlight on the supply stage.
The looming clouds scud over momentarily, overshadowing the current Middle Eastern turmoil, stagnant Chinese economy, and the abundant outputs from U.S., Brazil, Canada, and Guyana. Yet, Hollub’s baton predicts a plot twist by 2025’s final act.
But why this narrative arc? What narrative mechanics unfurl to flip this tapestry of supply and demand?
To untangle this enigma, let’s rewind the reel back to Reuters, a year in retrospective:
In a tug-of-war between governmental climate combat and oil conglomerates’ profit quests, investments in fresh oil supplies slacken. Aye, a crisis unfolds as Exxon Mobil’s Darren Woods articulates – a depletion race envelops, with oil and gas reserves waning at 5-7% yearly. Discontinuance in investments forebodes a melancholic symphony, heralding a future saturated with hunger and dearth.
Insights into Shifting Dynamics in Oil Market
The DUC Well Dilemma
As the number of Drilled But Uncompleted (DUC) wells hits a low not seen in over a decade, the oil market dynamics are undergoing a subtle yet significant shift. DUC wells, serving as a reservoir of untapped potential, are now being swiftly converted to capitalize on oil price surges. With oil companies depleting this inventory rapidly, a pivotal moment looms on the horizon.
Diminishing Inventory Signals Change
The dwindling inventory of DUC wells at a 10-year low suggests that U.S. oil companies have largely exhausted the “easy money” from price spikes. To navigate the evolving landscape, companies must pivot towards increased drilling activity. However, the current trend reveals a contrary reality.
The declining count of active oil-drilling rigs in the U.S., persisting for over a year and currently standing 26% below the 10-year average, indicates a looming supply crunch. The absence of a significant supply boost on the horizon foretells of challenges ahead.
Future Projections and Investment Potential
Looking forward, the prevailing headwinds in supply and demand are set to transform into a favorable tailwind within approximately 15 months. This impending shift underscores the importance of a forward-looking investment strategy in the oil sector.
Valuation Comparison: Big Oil vs. Market Averages
Comparing the price-to-earnings (PE) ratios and dividend yields of major oil players like Exxon, Shell, ConocoPhillips, Diamondback Energy, and Equinor against the S&P’s current metrics reveals compelling opportunities. While short-term fluctuations might lead to temporary declines, the long-term investment merits of these companies appear robust.
- Exxon: PE 13.9, dividend yield 3.4%
- Shell: PE 11.6, dividend yield 4.2%
- ConocoPhillips: PE 11.7, dividend yield 3.0%
- Diamondback Energy: PE 8.7, dividend yield 6.4%
- Equinor: PE 7.6, dividend yield 5.4%
While short-term fluctuations may occur, a prudent long-term investor should consider the potential gains over an extended horizon of 18-24 months. The current valuation of Big Oil players presents an enticing prospect for future returns.
Market Trends and Trading Strategy
Despite the favorable long-term outlook, caution is advised in the short term. Current momentum in the market reflects a bearish sentiment, with consecutive monthly losses indicating a challenging trading environment. Anticipating a potential reversal, strategists advocate restraint and patience in entering positions, emphasizing the need for cautious, evidence-based decision-making.
While the market may exhibit volatile shifts in the near future, the overarching imbalance in supply and demand portends a substantial reversal in sentiment. Today’s bearish climate may pave the way for a future characterized by bullish optimism and lucrative opportunities for astute investors.
Investors are advised to tread carefully, acknowledging the complexities of the evolving oil market dynamics and positioning themselves strategically for the transformations ahead.