Sweet 16 Update - October 5

[dan_s]

All of the Sweet 16 were down last week thanks to the slide in the oil price since the big spike up on September 16. It is really hard to believe that 100% of the geopolitical risk premium in the oil price disappeared in less than 14 trading days after the largest attack on Saudi Arabia oil infrastructure EVER.

Saudi Arabia may have restored oil production capacity, but their oil export capacity is going to remain low for months. Saudi can only meet the demand of their oil customers by draining their storage. By year-end, global oil inventories are going to be dangerously low. As shown on page two of the 10/1/2019 newsletter, Saudi oil inventories have declined 43% since 2015 at a fairly steady pace. Saudi doesn't have the production capacity of 12 MMBOPD that they have claimed. My guess is that the Aramco IPO is because Saudi cannot maintain oil production at 10 MMBOPD much longer. They are going to need BIG SALE of part of Aramco to maintain the royal lifestyle.

In today's podcast, which should be on our website by mid-afternoon on Saturday, I stress that global demand for oil moves relentlessly higher unless there is a MAJOR recession. All major recessions have come after an extended period of high oil prices. In mid-2008, right before the global financial crisis, the price of WTI spiked to over $147/bbl. The high oil prices caused high inflation, which caused housing prices to go up. The idiot bankers assumed real estate prices would keep going up, so they gave home mortgages to people who should never have been approved for the loans.

With today's full employment in the U.S. and low energy prices, it is hard to imagine a severe recession in the U.S. Europe is an issue, but a much smaller part of the global economy. China's economy is slowing, but still growing. Outside of China, the rest of Asia should be doing fine with more companies moving manufacturing out of China. Trump will ink a deal with China before the next election, which will send stock prices and oil prices higher.

Back in the Real World....

Note on slide 2 of the podcast that WTI bounced off of a very strong and important support level at $51/bbl on Thursday. It was the 3rd test of $51 since the high in late April. From early August to September 13 (day before the attack on Saudi Arabia) WTI was in a well-defined upward pointing trading channel that pointed to $60/bbl in October. If the "FEAR" of a global recession can be reduced a bit, WTI should return to the trading channel (at least that is my "HOPE"). Keep in mind that the speculative oil futures traders love clearly defined channels.

WTI did average over $56/bbl in Q3, so all of the Sweet 16 will be reporting good results for Q3. I'm still using $60/bbl WTI in all of my forecasts for Q4 and all of 2020. I will let October play out to see if I need to make an adjustment.

Natural gas prices pulled back, but are still higher than what I'm using in my models. Natural gas prices and NGL prices will be close to where they were in Q2 (very low), but should improve in Q4. NGL prices are seldom discussed, but the Sweet 16 do produce a lot of NGLs. Antero Resources (AR) is the largest producer of NGLs.

There are rumors that FANG, PXD and XEC are takeover targets of Chevron and Exxon. If a major goes after those three they will need to offer big premiums for them. Once they are "In Play" the bidding wars will get interesting. Lots of high profile M&A usually marks the end of an oil price cycle.

The Oilfield Services sub-sector is the most at risk near-term because upstream capex spending will not go up until there is an extended period of higher oil prices. Upstream companies won't increase D&C spending until they are sure commodity prices are going to hold up. This is setting up a classic oil price cycle reversal in 2020.

As I point out on slide 14 of the podcast, demand for oil will go up 5 to 7 million barrels per day over the next five years and I don't see the necessary supply response coming at today's oil price. U.S. oil production growth has stopped.

The situation with Iran is far from being resolved. Part of last weeks oil price decline was caused by reports that Iran is willing to negotiate a peaceful settlement IF THE U.S. LIFTS THE SANCTIONS. Trump knows the sanctions are working and he knows the Iranians are lying. The Persians are not afraid of war; I think they enjoy it. Iran knows Trump doesn't want war heading into an elections and they know Saudi Arabia knows they can't defeat Iran without U.S. support. Iran's tactic will probably be continued limited by strategic attacks on tankers and infrastructure. As long as they are limited and don't kill a lot of people, Trump is likely not to approve a military strike. It is a very dangerous game, but other than agreeing to all of Trump's demands there is no alternative that I can see. Watch video here: https://www.foxnews.com/world/iran-nucl ... rld-powers

The Sweet 16 is trading as if WTI is going below $50 and staying there forever.