Portfolio Manager’s Monthly Update – December 2018
December 12, 2018
Dear Partners,
Oil prices have continued to decline, creating a disproportionate impact on most oil related shares. As I mentioned last month, the price of oil and oil stocks increased over the spring and summer on talk of several factors — looming shortages, sanctions on Iran and $100 oil among them. When that did not continue as expected, the reaction was swift and negative. At the time of this writing, markets have settled down, and we hope the OPEC cuts will be sufficient to balance the markets. Additionally, the US and China have begun talking again, which may provide some relief to worldwide trade and tariff fears.
For us, oil prices have been the big issue. The U.S. has continued to add a lot of supply during the past few months. As we have mentioned before, this is ongoing and expected — not so with Russia or Saudi Arabia. Russia does so because they can, and the Saudis do so wrong-headedly. The Russians remain defiant and they only operate in self-interest. That is no surprise to anyone. They have been lucky to have costs in rubles, and export revenues in dollars. Unfortunately, that is bad luck for everyone else. The Saudis are trying to maintain a semblance of control. Their best move would be to live within their budget on ten or even nine million barrels a day. That would put them in the best position to maximize their own revenues and their best chance to remain relevant for the longest period in influencing pricing. Though in the long run, it does not matter what they do.
A flood of oil will come out of the Permian Basin within the next 24 months and continue for years. Potentially lower prices may ensue as Permian production comes online. According to International Energy Agency (IEA) estimates, worldwide demand for oil will increase by about 6 million barrels a day over the next five years. On top of that, there will be some depletion of existing production and possible disruptions. Spending worldwide needs to increase or depletion will increase.
It is realistic to consider that there will be some continuous disruption somewhere. Venezuela is broke and its production declining. Libya announced that 400,000 bbl. went offline because tribesmen took over their largest field. These are but two examples. We do not include missing barrels from disruptions but we should expect some.
The bottom line is that there is room for production from the Permian Basin, and over time, prices will begin to move higher.
Dana McGinnis & Mission Advisors