Energy Prospectus

WTI at $62.40 at 1:15PM ET

My take is that we had an initial wave of short covering this morning that took WTI to $60. Then we had a pause because of lack of new information. The pause encouraged some funds to lay on shorts again, which lead to a second wave of short covering when buyers moved in on bullish news to take out the short's stop loss orders.

U.S. claims that they now have proof of a very sophisticated drone/missile attack coming from Iraq or Iran increases the chance of a significant military response. In my opinion, there needs to be a $10 to $15 per barrel "geopolitical risk premium" placed on oil futures.

News that Iran seized another oil tanker takes the chance of U.S. lead military strike to over 90%.

Keep in mind that when EIA reports actual U.S. oil production for July it is likely to show a big decline from June thanks to Hurricane Berry.
Weekly active drilling rig report will probably continue showing drops.
We are still in the peak month for hurricane activity in the GOM.

My forecast that WTI will move into the $65 to $75 range in 2020 now looks more likely. Raymond James is holding to their forecast that WTI trades over $75 by year-end.

WTI prompt month NYMEX contract (October) closed at $62.90/bbl, Up $8.05/bbl on VERY HEAVY volume and heavy trading into the close.
Today's trading range was $58.77 to $63.38. The October contract did drift lower in after-hours trading.
The "Big Question" for traders is how much "Risk Premium" is now appropriate considering the very high level of tension in the Persian Gulf Region. My take is $10 to $15 per barrel. Prior to Saturday's drone attacks on Saudi Arabia there was almost no risk premium and talk that Trump might ease up sanctions against Iran. Today Trump says we are "Locked and Loaded" + Iran seized another tanker today. Pompeo says he now has proof that the attack came from the north; from Iraq or Iran.

Also, Natural gas prompt month (OCT 19) was up $0.067 on the day, to settle at $2.681/MMBtu.

Here is why oil prices may move quite a bit higher:

1. The attacks on the world's largest oil processing facility were extremely sophisticated and show how vulnerable the Saudi Arabian facilities are. Up until now the "paradigm" on Wall Street was that Saudi processing facilities (especially this one) and oilfields were extremely well protected. Now we see at least ten drones get through the defense and so far there is no evidence that there was any attempt to shoot them down. BTW the U.S. reported today that 19 targets were hit.
2. U.S. intelligence says that drones came from the NNW, probably launched from Iraq.
3. Drones and or missiles used were weapons provided by Iran so who cares who actually fired them? Iran was clearly behind the attacks.
4. ION Energy reported this afternoon that it will take Aramco "many weeks" to repair the damage and 3 million BOPD of production may need to be shut in for at least a month.
5. Kuwait and UAE have spare capacity, but are they willing to become targets of Iran?
6. The attacks were clearly an "Act of War" on Saudi Arabia. So, what is the U.S. response? Do U.S. planes lead the attack or does the U.S. just provide logistical response? My take is that Iran would love to shoot down a bunch of Saudi warplanes. Persians love to fight and scream about their great victories.
7. My "guess" is that several dozen U.S. cruise missiles are fired from U.S. and British warships outside the Persian Gulf at Iranian military bases. Then what happens? This is the BIG QUESTION MARK?
8. Last week there were rumors of Trump lowering sanctions on Iran. The chance of that happening is now ZERO.

What should investors do?
1. Clearly this is a big plus for U.S. upstream oil & gas companies. In my opinion, investing in the equities has more upside than buying oil futures. The Sweet 16 and our Small-Cap Growth Portfolio are still trading way below any reasonable valuation if you believe oil is going to stay over $60/bbl.
2. The attack on Saudi Arabia draws more attention to the energy sector. If the Wall Street Gang now believes oil will stay over $60/bbl, the list of grossly-oversold stocks is quite long.
3. It allows upstream companies to hedge their oil at higher prices; reducing the perception of risk.
4. International investors will see the U.S. as the "Safe Place" to invest in oil. Plus, natural gas prices are also moving higher than I expected. Hedge fund managers looking to rotate money into U.S. companies will find some extremely profitable companies trading at much lower multiples than the S&P 500 average.
5. Wall Street is a "Herd". If the leaders of the herd (i.e. - Goldman Sachs, Morgan-Stanley, etc.) say now is the time to buy energy stocks, the herd will be trampling each other to get through a small window.

It is extremely important to know where your upstream companies produce from, how much they have hedged and what markets are open to them. South Texas (Eagle Ford) companies get a premium to WTI oil prices. CLR, EOG and VNOM have none of their oil hedged. Companies that hedge with collars have more upside than those that hedge with swaps.

All of the forecast/valuation models on the EPG website assume that WTI will average $55/bbl in Q3 2019 and $60/bbl for all future periods. The forecast spreadsheets are valuable tools, but you need to take a few minutes to learn how to use them.