Energy Prospectus

The Sweet 16 declined 6.5% during the week that ended May 31. It is now down 5.13% YTD.

Oil traders and energy investors are engulfed in FEAR that the U.S. vs China and now U.S. vs Mexico will go on much longer than expected. At the beginning of May Wall Street believed that Team Trump was close to a deal with China and that it had already worked out "NAFTA 2.0" with Mexico and Canada. Today, no one has a clue when these trade wars will end. Oil trader hate uncertainty and today we have it in spades.

WTI crude oil price dropped ~14% in May (the worst month since November, 2018), but it is still up ~16% YTD. Keep in mind that the price you see reported in the news each day is the front month NYMEX futures contract, which is now July. The April, May and June NYMEX contracts averaged more than $60/bbl, which means all of the Sweet 16 should report much higher liquids prices in Q2 than they did in Q1.

Interesting to me (because I've never seen it happen) the First Call price targets for all 16 companies have remained exactly the same for the last two weeks. The Sweet 16 is now trading 131% below my "Fair Value Estimates" and 72% below First Call's price targets. I cannot recall the Sweet 16 EVER trading this far below First Call's price targets. You can find my valuations and First Call's price targets for each company on the Sweet 16 main spreadsheet under Tab 2 of the spreadsheet. It is best to download the spreadsheet to Excel to view it.

Antero Resources (AR) is down the most (-30%) despite the fact that 100% of their natural gas for 2019 is hedged. More than 55% of their 2020 is hedged with SWAPs at $3.00/MMBtu.

So...the $Billion question is where do oil & gas prices go from here?
1. IMO OPEC+ is now ~98% sure to stick with their production cuts when they meet later in June because they must have higher prices. Saudi Arabia still needs $80/bbl Brent to balance their budget. The situations in Iran, Venezuela and Libya did not suddenly get any better. Remember, unless the U.S. lifts sanctions on Iran there is no way that OPEC can increase production back to what they produced in Q4 2018.
2. As I pointed out in the newsletter (see chart on the top of page 2), demand for oil always goes up in Q2 and Q3. We should see U.S. and OECD crude oil inventories declining in June.
3. U.S. oil production is flat. In fact, the March 941 report shows that U.S. production declined in Q1 and that EIA overstated U.S. oil production by more than 300,000 barrels per day in their February and March weekly reports. Those weekly reports are just estimates based on formulas.
4. If the U.S. vs China trade war goes on through December, it might lower global demand by 200,000 to 300,000 barrels per day.

Natural gas prices dipped below $2.50/MMBtu on Friday, but I think that is more in response to the big drop in the oil price. We are now past the first "Shoulder Season", so demand for gas (for power generation) will be picking up during June to September.

Despite Headlines, Global Oil Demand Remains Robust
G&R Natural Resource Investors 05/ 30/ 2019
Topics: Oil Markets, commodities, Natural Resources

Despite 2019’s rally in oil prices, investors remain bearish towards oil-related equities. While Brent and WTI prices rallied between 25 and 30% from their Christmas Eve-lows, oil-related stocks advanced by only half that amount. In past blogs we explained how certain high-quality E&P companies (not all mind you) are generating real value like never before, despite the common wisdom that the oil and gas E&P “model is broken” and some investors complain that the sector as a whole has become “un-investible.” While this line of thinking is pervasive, nothing could be further from the truth and we will explain why the fundamentals are more bullish today than we ever recall seeing them. Far from being broken, we think that Tier 1 E&Ps offer some of the best investments in the market today.

Global oil demand remains extremely strong. The IEA released its 2018 Global Energy & CO2 Status Report on March 26, 2019, stating that global primary energy demand surged last year. Despite the barrage of bearish headlines, total energy demand grew by 2.3% in 2018 – twice the average rate of the previous decade. Every country goes through a period of strong energy demand growth (the S-Curve). The number of people simultaneously going through this period has jumped from an average of 700 million between 1970 and 2010 to over four billion today. The importance of this shift cannot be overstated and will persist for many years to come.

Furthermore, we believe global primary energy demand will be revised even higher, driven by adjustments to global crude demand. Global oil demand makes up approximately 35% of total primary energy demand. The IEA estimates that global oil demand grew by 1.3 mm b/d or approximately 1.3% last year. According to their latest report, demand softened during Q4 as global economic activity deteriorated. Even though this view was largely echoed in the press, the data suggests otherwise.

The IEA estimates Q4 demand averaged 99.6 mm b/d while global supply averaged 101.9 mm b/d implying inventories should have grown by a very large 2.3 mm b/d (consistent with a global economic slow-down). Instead, inventories actually declined during Q4 by 100,000 b/d. Even factoring in “floating storage” (which in our experience usually ends up being revised away as understated demand), missing barrels still reached a record 1.8 m b/d, based on the IEA’s figures during Q4. Longtime readers know we believe these “missing barrels” are actually understated emerging market S-Curve-related demand. For 2018 as a whole, the “missing barrels” averaged 900,000 b/d. If our models are correct and these missing barrels are actually understated demand, then 2018 global oil consumption actually grew by 2.2% to reach 101.1 mm b/d, implying global primary energy grew by 3.0% or nearly two-and-a-half times the average of the past decade. Far from reaching “peak demand,” the world is now entering into a period of sustained accelerating consumption – a period we are calling the “golden age of demand.”
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