Investing

is now the time to invest in oil stocks?

  • Last Updated:
  • Nov 17th, 2017 1:44 pm
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Sr. Member
Nov 28, 2010
894 posts
124 upvotes
Brampton
Considering enb again but how low is low enough.
Member
User avatar
Oct 14, 2015
216 posts
26 upvotes
Drumheller
All this chatter about ENB making me take notice; sold mine quite a while ago.
If it gets near $40, I may get back in.

Chart from Model Price App on Facebook (used with permission).

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ADDED:
A positive for ENB is that nearly two-thirds of sales are done in USA.

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Source: http://www.4-traders.com/ENBRIDGE-INC-1409882/company/
Deal Addict
Jan 3, 2013
1818 posts
150 upvotes
Sidney
jerryhung wrote:
Aug 16th, 2017 11:30 am
so they can find excuse & push WTI down regardless of any good EIA report
and of course TSX Energy goes down with it

Image
Yeah... 9 million barrel draw... Still goes down. Bears in control. We'll probably stagnate between $40 and $50 for years. Could be an underperforming sector for years.
Member
Jun 28, 2016
205 posts
91 upvotes
favelle75 wrote:
Aug 16th, 2017 4:19 pm
Yeah... 9 million barrel draw... Still goes down. Bears in control. We'll probably stagnate between $40 and $50 for years. Could be an underperforming sector for years.
I really, really doubt it. We've dropped from 34.1 days of supply to 26.7 days of supply since March, and, if the current summer trend keeps up, will be down to 24-25 days of supply by mid-September. That's when refinery runs would normally cause a build, but the Gulf producers are cutting exports to the US, while they refill their inventories in August and September, so we might even be flat in October, while gasoline draws seasonally. The second half of the year is also when global oil draws fastest historically (although not US oil).

https://www.eia.gov/dnav/pet/hist/LeafH ... S_DAYS&f=W

The current swoon is being driven by fears that US production will inexorably rise at a breakneck pace no matter the price (ignoring the fact that 11% of 2018 shale production is hedged as of the end of quarter 2, 2017) and fears that the OPEC deal is falling apart. Added to that are fears that Libya might add another 300,000 bpd of production by year's end. All of these are problematic assumptions. For example, this week, there was much excitement over US production rising by 75,000 bpd, but two thirds of that was in Alaska, as maintenance at certain oil producers came to an end. Otherwise, US oil continued the 15,000-25,000 bpd production increases each week which it's been doing for the past few months. Scary headlines appeared about how Libya's biggest field had added 30,000 bpd in one day, but this 'addition' was just restoring some of the 100,000 bpd of production which the field lost last week. Libyan production outages should be bullish, not reinterpreted as bearish events. The OPEC deal is somewhat more fragile, but it's doubtful compliance can drop much more (from around 75%) as the remaining honoured cuts are either involuntary (such as in Venezuela, which cannot maintain production) or in the Gulf (where Saudi Arabia is firmly in control). Moreover, the idea that OPEC can just open the floodtaps is misleading, as OPEC's spare capacity is not actually high in historical terms.

https://www.eia.gov/finance/markets/cru ... y-opec.php

OPEC almost never pumps full out (as they did late last year) and, even if they did, that would only add about 1 million bpd to the market. One should note that pumping nearly full out is what the IEA is assuming that OPEC will do after March of 2018, which is where their projection that 2018 may be in surplus comes from.

Right now, fundamentals are being ignored in favour of sentiment, but that can only go on for so long. If oil prices remain below $50, US shale will not be able to hedge its 2018 production, in which case, it's hard to imagine the 1 million bpd growth in US production the IEA's forecasts predict will actually materialize. Venezuelan production is falling faster than anticipated, and the prospect of a major outage is growing so severe that Venezuela's own state oil company is looking into alternate sources for its US subsidiary's refineries in the event that Venezuelan exports to the US fall off a cliff. If OPEC preserves its cuts (or even some of them) next March, things will look even better, and the Saudi Aramco IPO is coming up soon.

Perhaps most crucially, demand for crude oil is extremely strong. A demand increase of 1.5 million bpd this year and another 1.4 million bpd next year makes it very clear that 'peak oil demand' is still far off, which means there will be more oil need in 2019, more oil needed in 2020, and there is not nearly enough new production coming down the pipes in those years to fill the gap. Will this be the year oil prices rapidly rise? Probably only if there's a geopolitical catalyst (Venezuela, Libya and Nigeria all offer realistic possibilities there). Next year? Much more possible, and more and more likely the longer we remain sub-50 (as US producers keep putting off their hedging). An OPEC deal extension could also make it happen, as could geopolitical outages or even just rising interest rates stifling US shale's access to cheap money. 70% of non-OPEC production growth in 2018 is supposed to come from US shale (most of that from the Permian) so anything that hurts US shale production growth is a big positive for 2018. 2-3 years from now, though, unless you think electric cars will have taken a big bite out of oil demand (which virtually no one expects before the mid-2020s, at the earliest) we will be looking at a big gap between supply and demand -- one that shale wouldn't even be able to fill at $60/barrel without help from higher cost producers.
Jr. Member
Jan 27, 2016
148 posts
95 upvotes
Toronto, ON
nicely written wavelet!

I have begun buying small cap oil plays with little to no debt on the venture this summer, been on a buying spree...basically buying at 52 week lows..who knows when oil will come back but i believe it will...now will it come back to 100 a bar? probably not, but good producers don't need 100$...they really only need mid 50's-60's
Deal Addict
Jan 3, 2013
1818 posts
150 upvotes
Sidney
Wavelet wrote:
Aug 16th, 2017 9:44 pm
I really, really doubt it. We've dropped from 34.1 days of supply to 26.7 days of supply since March, and, if the current summer trend keeps up, will be down to 24-25 days of supply by mid-September. That's when refinery runs would normally cause a build, but the Gulf producers are cutting exports to the US, while they refill their inventories in August and September, so we might even be flat in October, while gasoline draws seasonally. The second half of the year is also when global oil draws fastest historically (although not US oil).

https://www.eia.gov/dnav/pet/hist/LeafH ... S_DAYS&f=W

The current swoon is being driven by fears that US production will inexorably rise at a breakneck pace no matter the price (ignoring the fact that 11% of 2018 shale production is hedged as of the end of quarter 2, 2017) and fears that the OPEC deal is falling apart. Added to that are fears that Libya might add another 300,000 bpd of production by year's end. All of these are problematic assumptions. For example, this week, there was much excitement over US production rising by 75,000 bpd, but two thirds of that was in Alaska, as maintenance at certain oil producers came to an end. Otherwise, US oil continued the 15,000-25,000 bpd production increases each week which it's been doing for the past few months. Scary headlines appeared about how Libya's biggest field had added 30,000 bpd in one day, but this 'addition' was just restoring some of the 100,000 bpd of production which the field lost last week. Libyan production outages should be bullish, not reinterpreted as bearish events. The OPEC deal is somewhat more fragile, but it's doubtful compliance can drop much more (from around 75%) as the remaining honoured cuts are either involuntary (such as in Venezuela, which cannot maintain production) or in the Gulf (where Saudi Arabia is firmly in control). Moreover, the idea that OPEC can just open the floodtaps is misleading, as OPEC's spare capacity is not actually high in historical terms.

https://www.eia.gov/finance/markets/cru ... y-opec.php

OPEC almost never pumps full out (as they did late last year) and, even if they did, that would only add about 1 million bpd to the market. One should note that pumping nearly full out is what the IEA is assuming that OPEC will do after March of 2018, which is where their projection that 2018 may be in surplus comes from.

Right now, fundamentals are being ignored in favour of sentiment, but that can only go on for so long. If oil prices remain below $50, US shale will not be able to hedge its 2018 production, in which case, it's hard to imagine the 1 million bpd growth in US production the IEA's forecasts predict will actually materialize. Venezuelan production is falling faster than anticipated, and the prospect of a major outage is growing so severe that Venezuela's own state oil company is looking into alternate sources for its US subsidiary's refineries in the event that Venezuelan exports to the US fall off a cliff. If OPEC preserves its cuts (or even some of them) next March, things will look even better, and the Saudi Aramco IPO is coming up soon.

Perhaps most crucially, demand for crude oil is extremely strong. A demand increase of 1.5 million bpd this year and another 1.4 million bpd next year makes it very clear that 'peak oil demand' is still far off, which means there will be more oil need in 2019, more oil needed in 2020, and there is not nearly enough new production coming down the pipes in those years to fill the gap. Will this be the year oil prices rapidly rise? Probably only if there's a geopolitical catalyst (Venezuela, Libya and Nigeria all offer realistic possibilities there). Next year? Much more possible, and more and more likely the longer we remain sub-50 (as US producers keep putting off their hedging). An OPEC deal extension could also make it happen, as could geopolitical outages or even just rising interest rates stifling US shale's access to cheap money. 70% of non-OPEC production growth in 2018 is supposed to come from US shale (most of that from the Permian) so anything that hurts US shale production growth is a big positive for 2018. 2-3 years from now, though, unless you think electric cars will have taken a big bite out of oil demand (which virtually no one expects before the mid-2020s, at the earliest) we will be looking at a big gap between supply and demand -- one that shale wouldn't even be able to fill at $60/barrel without help from higher cost producers.
You should go all-in then.
Member
Jun 28, 2016
205 posts
91 upvotes
favelle75 wrote:
Aug 17th, 2017 8:30 pm
You should go all-in then.
No I shouldn't because there's still considerable downside risk. Big risks:

1. A major recession. This is a risk for all stocks, but I'd feel really dumb if I went all in today, only for the whole market (including oil stocks) to tank in the fall. Eventually, they would recover, as recessions don't last forever, but there could still be a lot of pain to come, and some of the more highly leveraged producers could still fold entirely. It would also significantly slow rebalancing, as recessions always hurt demand growth.
2. OPEC deal completely falls apart in March or earlier and OPEC starts aggressively competing for market share like it did in 2016. I said that this was unlikely, but it's still possible. If OPEC suddenly dumps another million bpd (roughly their limit) onto the market, and Russia also adds its 300,000 bpd cut back into the mix as well, then we could very well head down into the 30s again for the half a year it would take before shale production collapsed again. This would do horrible things to OPEC members' finances (which is why they don't want it) but we've seen them do it before.
3. This year, crude supply outages were the lowest they've been since 2012, unstable major producers unexpectedly stabilized, bringing huge amounts of oil back onto the market. At the same time, ultra low interest rates allowed companies in the US to rapidly grow production, even while they were losing money hand over fist. Will all of these happy circumstances continue? The world in which they all continue, while demand growth moderates to say 1 million bpd (for the next few years) is called lower for longer. Many big banks believe in it, and consequently project $40-$60 oil out to 2020/2021 (after which many, but not all of them, expect a supply shock). I'm fairly confident that low oil prices will continue spurring very strong demand growth (barring a recession) as they did so last year and are doing so this year. I don't think that investors will continue funding double digit production growth in companies where they are losing money on every barrel produced forever. I also am skeptical of the idea that we're heading into a more stable world with far fewer supply disruptions. Consequently, I doubt the lower for longer thesis, but it is still entirely possible.
4. An unexpected technological change. This is always possible. Many people would point to shale oil for this, but I think natural gas is a better example. Without the massive shale production in the US today, natural gas prices would be far, far higher. Those who predicted natural gas prices 5 years ago had no idea this was coming, so all their price projections ended up way off. Russia, China and many other countries (the US included) are still working hard at innovating. Discounting the possibility that they could find some effective way of producing more cheap oil or radically decreasing consumption in the next 5-10 years would not be wise. This is a tail risk, but it's still worth taking account of it.

I am significantly overweight in oil producers/pipelines. I like North American pipelines because they benefit both in the lower for longer world (as this world is built on the assumption of > 1 million bpd North American production growth for years) and in the world where oil prices rise. There are still risks, but for the better managed ones (ENB, IPL... etc...) I think that there are excellent opportunities. I also like oil producers that can likely survive another downturn (even if I think it unlikely) by either having solid balance sheets or generating impressive cash flow in the 40s with little or no debt (this latter group is mostly small companies). Suncor is too pricey for me right now, but I do like CNQ and Imperial Oil, as well as some of the smaller producers with low break-evens and very little debt. Some of the US majors are also interesting, but I'm generally avoiding the Permian, as those guys are still trading at a premium to other oil producers which I consider too big.
Member
Feb 26, 2017
300 posts
81 upvotes
jerryhung wrote:
Aug 18th, 2017 10:49 am
wow

IPL dropped like -10% since Aug 8 (after ER), $25 to now $22.5 (Feb 2016 level)

So are other pipeline companies dropping
The earnings report for IPL wasn't even that bad. The miss was primarily due to maintenance at one of their NGL processing plants and their payout ratio was 73%. I just bought shares of IPL through the drip and they were bought at 24.56 which must be what they were trading at last ex date. I need to keep reminding myself that I'm using a buy and hold dividend growth strategy...
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User avatar
Sep 19, 2004
20292 posts
3088 upvotes
Waterloo
Chance7652 wrote:
Aug 18th, 2017 11:19 am
The earnings report for IPL wasn't even that bad. The miss was primarily due to maintenance at one of their NGL processing plants and their payout ratio was 73%. I just bought shares of IPL through the drip and they were bought at 24.56 which must be what they were trading at last ex date. I need to keep reminding myself that I'm using a buy and hold dividend growth strategy...
Fundamentals are not even relevant in this super bearish market. All my dividend ENERGY companies are lows. ENB, ENF, PPL, IPL, ALA/ALA.r, ETP, NPI, PKI
while other Dividend NON-ENERGY are pretty high CHR, CJR.B except BCE or AT&T

at 12 pm, USO/WTI is +1.7% ~$48 USD, I bet you won't see a rally in TSX Energy (I'll be happy to be wrong)
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Member
Jun 28, 2016
205 posts
91 upvotes
MrMom wrote:
Aug 18th, 2017 10:16 am
Update to: now-time-invest-oil-stocks-1616895/418/#p28113906

Just saw on Bberg TV that the premium for Brent is increasing from ~$3 closer to $4. Brent (BZV7) to WTI (CLV7) is about $3.80 atm. At the same time the WCS spread to WTI is also widening. => not supportive of Cdn producers
Calling WCS/WTI not supportive must be some sort of joke. The differential has not been this narrow since June of 2015 and (before that) in 2012. This time last year, the differential was 18, and right now it's 11.8. That it's come up a bit from 9.7 in April just takes it from absurdly low to very low.

Today, oil is up almost 3% (I'd like to pretend it was the supportive rig count, but the move up was well underway before it came out) and the Canadian oil producers are all dead money. You should just accept that, until the market starts running on fundamentals again (and no one can say precisely when that will be, just that it will eventually happen) you're better off buying a chart and looking at voodoo like technicals than trying to make sense of very short-term oil stock price movements on the basis of fundamentals.

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