Sweet 16 Update - June 16
Posted: Sat Jun 16, 2018 1:29 pm
The Sweet 16 moved 2.17% lower during the week ending June 15, 2018 as FEAR of OPEC + Russia increasing production caused investors to move to the sidelines. FEAR #2 is the Permian Basin Pipeline Takeaway Capacity issue.
The Sweet 16 is now down 8.62% YTD, which is puzzling since oil, gas and NGL markets look much better today than they did at the beginning of the year.
Will "Reality" trump "Fear"? In the long-run it always does for commodity based industries.
The OPEC cartel countries are meeting in Vienna on June 22nd to discuss how they want to adjust their production quotas now that the global oil markets are back in balance. When FEAR meets REALITY in Vienna, I think the share prices of this high quality group will firm up.
OPEC is not expected to make a significant change in their quotas, primarily because they have been producing below the old quotas all year. Unless they magically find lots of spare production capacity sitting around, it will take time to increase production no matter what they decide to do.
> Per IEA's Oil Market Report: "OPEC crude supply edged up 50,000 b/d in May to 31.69 million b/d. Higher flows from Saudi Arabia, Iraq and Algeria offset a fall in Nigeria and further declines in Venezuela. While the call on OPEC is set to ease in 2019, potential losses from Venezuela and Iran could require others to produce more."
> Ten of the fourteen OPEC members are already producing flat out and they will not be keen on the idea of giving Saudi Arabia more market share.
> It would be extremely foolish for OPEC to do anything to reduce oil prices that they worked so hard to shore up.
> Russia also understands the math that selling 5% more oil at 10% low price for all of their oil means less cash to them.
> Saudi Arabia wants to take a piece of Aramco public. Why would they want to lower oil prices ahead of the IPO?
> Venezuela is a failed state in free fall.
> Iran is going to be hit with serious sanctions in a few months.
FANG, GPOR and MTDR were the only three Sweet 16 up for the week.
The J.P. Morgan 2018 Energy Conference in New York City is Monday, June 18th through Wednesday, June 20th. I'm sure each presenting company will go into detail on how they are going to deal with the pipeline takeaway issue in West Texas. In my opinion, this FEAR has been blown way out of proportion to reality. At the peak of the takeaway shortage, less than 5% of Permian Basin oil will need to be taken out by truck or by rail. Upstream companies will have no problem finding trucking companies eager to haul their oil at premium prices.
A related FEAR is that storage at Cushing, OK will fill up. That is NOT GOING TO HAPPEN. Cushing storage is WAY DOWN TODAY to about half of total storage capacity at Cushing of ~75 million barrels. Check for yourself here: https://www.eia.gov/dnav/pet/hist/LeafH ... K_MBBL&f=W
Companies that can get their oil to the Gulf Coast will get a premium to WTI. Last week LLS was selling for small premium to Brent.
The outlook for our three "gassers" (AR, GPOR and RRC) improves with each penny increase in the price of natural gas. The JULY HH NYMEX contract for natural gas closed at $3.028/MMBTU on Friday. The NYMEX strip for HH gas is now over $3.087/MMBTU for July to March. No one predicted this and several of our members have been sending me predictions of a big increase in U.S. gas supply. They forget that demand for natural gas is rising as fast as supply.
All of the Sweet 16 produce a mixture of oil, natural gas and NGLs. You can find their production mix at the bottom of each forecast/valuation model on our website.
The Sweet 16 is now down 8.62% YTD, which is puzzling since oil, gas and NGL markets look much better today than they did at the beginning of the year.
Will "Reality" trump "Fear"? In the long-run it always does for commodity based industries.
The OPEC cartel countries are meeting in Vienna on June 22nd to discuss how they want to adjust their production quotas now that the global oil markets are back in balance. When FEAR meets REALITY in Vienna, I think the share prices of this high quality group will firm up.
OPEC is not expected to make a significant change in their quotas, primarily because they have been producing below the old quotas all year. Unless they magically find lots of spare production capacity sitting around, it will take time to increase production no matter what they decide to do.
> Per IEA's Oil Market Report: "OPEC crude supply edged up 50,000 b/d in May to 31.69 million b/d. Higher flows from Saudi Arabia, Iraq and Algeria offset a fall in Nigeria and further declines in Venezuela. While the call on OPEC is set to ease in 2019, potential losses from Venezuela and Iran could require others to produce more."
> Ten of the fourteen OPEC members are already producing flat out and they will not be keen on the idea of giving Saudi Arabia more market share.
> It would be extremely foolish for OPEC to do anything to reduce oil prices that they worked so hard to shore up.
> Russia also understands the math that selling 5% more oil at 10% low price for all of their oil means less cash to them.
> Saudi Arabia wants to take a piece of Aramco public. Why would they want to lower oil prices ahead of the IPO?
> Venezuela is a failed state in free fall.
> Iran is going to be hit with serious sanctions in a few months.
FANG, GPOR and MTDR were the only three Sweet 16 up for the week.
The J.P. Morgan 2018 Energy Conference in New York City is Monday, June 18th through Wednesday, June 20th. I'm sure each presenting company will go into detail on how they are going to deal with the pipeline takeaway issue in West Texas. In my opinion, this FEAR has been blown way out of proportion to reality. At the peak of the takeaway shortage, less than 5% of Permian Basin oil will need to be taken out by truck or by rail. Upstream companies will have no problem finding trucking companies eager to haul their oil at premium prices.
A related FEAR is that storage at Cushing, OK will fill up. That is NOT GOING TO HAPPEN. Cushing storage is WAY DOWN TODAY to about half of total storage capacity at Cushing of ~75 million barrels. Check for yourself here: https://www.eia.gov/dnav/pet/hist/LeafH ... K_MBBL&f=W
Companies that can get their oil to the Gulf Coast will get a premium to WTI. Last week LLS was selling for small premium to Brent.
The outlook for our three "gassers" (AR, GPOR and RRC) improves with each penny increase in the price of natural gas. The JULY HH NYMEX contract for natural gas closed at $3.028/MMBTU on Friday. The NYMEX strip for HH gas is now over $3.087/MMBTU for July to March. No one predicted this and several of our members have been sending me predictions of a big increase in U.S. gas supply. They forget that demand for natural gas is rising as fast as supply.
All of the Sweet 16 produce a mixture of oil, natural gas and NGLs. You can find their production mix at the bottom of each forecast/valuation model on our website.