Portfolio Manager’s Monthly Update – October 2018

October 9, 2018

Dear Partners,

Oil prices have been pushing higher over the past few weeks because of a tightening of supply and looming sanctions on Iran’s oil output. It is hard to say where prices might go in the near-term, but from an economic point of view that does take into consideration a modest amount of political influence, an oil price in the $60-80/bbl range seems like it might be the sweet spot, for U.S producers where our interests lie.

In the long run, economics will rule prices as long as the U.S. can continue to increase production and export product. We think that time will be measured in decades.  The U.S. is in the best overall position worldwide to meet most of any rising demand with new production or meet the needs of flat worldwide demand created by natural depletion.  Only if demand rises quickly will there be a problem meeting the demand largely from the U.S.  We have said many times that in order to even maintain flat production, new drilling must occur and maintenance capital must be spent. Few countries have that capital now. At current prices, or lower, onshore U.S. is the best place to secure new production at a profit.

Bear in mind though, with prices above $60 and stable, the Gulf of Mexico and certain other offshore areas can be very profitable and prolific. Long lead times with high and stable prices though will be required. For the moment, the wild card is Iranian production and whether or not they can get around sanctions. We doubt this will happen. We think current U.S. policies are aimed at creating a more reasonable Iran which can add to the world economy, not cause trouble.  A stable Iran can and will increase production and put pressure on prices. No complaints here.

We firmly believe that the best place to be is the Permian Basin where prices are good and volumes are rising.  Investors may hear that expression in the future, over and over and it might sound boring. The cash flow will not be boring.

Yours sincerely,  Dana McGinnis & Mission Advisors