Oil Prices

Two MacroVoices interviews with Dr Annas Alhajji and Art Berman give an optimistic long term view on the crude oil market.

 Dr Annas Alhajji (22 June 2020):

• The surplus is now 180m barrels in inventories in OECD (excludes China), Saudi Arabia is trying to eliminate it.
• Comparing now and 2017: in 2017, oil inventories decreased 152m bbl in 10 months,.  This was done by the Saudis cutting production, US oil production increased by 1.2m barrels per day in that period.
• This time, the rest of the world is cutting production.  US production is down by 1.8m/day compared to 2017.  Libya is at 30-40,000 barrels/day, down from 1m in 2017.  Venezuela now 600k down from 1.9m.  Iraq exports are half of 2017.  Brazil, Norway, Ghana have increased, but small amounts.  Overall, we will get serious supply side issues in the future.
• Estimates the rebalance of the oil market will take a year.  Picture is way brighter in the next few months than people believe.
• Shale: only 25% of oil has being brought back, (due to price differentials between WTI and oil areas), once the differentials improve, will see major comeback.  Expects all major companies shale wells to come back online, but there is a problem due to lack of new drilling, needed to offset rapid shale declines.  Major decline may last for 2 years.  Thinks will bottom around 9.8-10m US production, then see a recovery.

Art Bernan (18th June 2020):

• US Production is down from 13.2m bpd to 10m
• Unlikely to see negative WTI again.  The govt has opened up strategic reserve space (to lease to store oil).  And the market should resolve any issues if it happens again.
• Can oil production be switched on and off immediately?  For shale (45% of US production), yes - barring occasional repairs, you can switch on/off production with a few clicks on an ipad.  For conventional, no. 
• The  current rally is just a relief rally, too many people were short oil.  There is still too much oil around (slide 11).
• Decline rates have been increasing with newer wells. 
• Time from rig to first oil production is around 10-12 months.  Estimates 16 months lag from when oil prices rise to make shale profitable, to the time the first shale can be drilled.
• So he expects the oil price to recover, longer term: "And that next down is going to be a buying opportunity. Because it sounds to me like maybe there’s a few more waves up and down along the way, but eventually we get a moon shot when there is a full economic recovery from this crisis and the industry is just not able to respond quickly enough."   [My notes: And I guess the recovery could be around 16+ months....]
• Slide 13 shows current recovery in oil consumption so far.  It has not recovered yet.  And the recovery has been mostly in gasoline.

What I am doing

Similar to last time:

• For my dividend stocks, added Frasers Centerpoint for full position.  Now ~43% invested (all in dividend stocks).  The dividends are not yet enough to live off.
• For the remaining ~40% of my portfolio allocated to macro, half is in gold (AAAU) and TIPS (ETF).  I consider these to be like cash.  Small 2% position in COW.

My trades are recorded in my Investing Note account.  This blog is for in-depth analysis.  I am now working again after a short time off, so less time to post here.

I think we get a correction or crash soon.  I'll look to add:

• BIP plus some Singapore REITs (MCT, FLIT).
• I think we get stagflation.  If the market corrects, then stocks in gold miners, copper miners, oil producers and fertiliser/farming companies look interesting.  Longer therm, my REITs should do OK in stagflationary periods (low interest rates and increasing nominal property prices, offset by lower rental demand).

Quick thoughts about inflation.  There are 3 causes:

• Too much money printing.  Like adding extra zeros to your currency.  Zimbabwe.
• Too much demand.  Overheating economy when production at full capacity.  Not now.
• Supply constraints.  Not enough investment (eg: finding new copper/oil reserves).  Production cost increases (de-globalisation).

I don't know exactly what form the inflation will take, or how it will be transmitted through the economy.  Too much detailed theory doesn't help you trade.  I look to play it broadly through holding real estate (REITs), commodities or commodity producers, and things that don't devalue with paper currency (gold, TIPS).  Residential housing may be another thing to consider.