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is now the time to invest in oil stocks?

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  • Oct 23rd, 2020 10:19 am
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Jul 30, 2012
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Brewmaster7 wrote: Good post and think you are right in some respects. I also think you have to consider the context of commodity prices when looking at what has happened to valuations over the last five years. Volatility in oil and gas prices has created a cloud of uncertainty in the cash flows and returns of E&P companies. That volatility has mostly been a downward trend with very few periods where prices have spiked up. The ESG movement has made it easier for for institutional investors to 'give up' on the sector, but it is really just due to poor returns and uncertainty of cash flows.

The reason to own the sector at this point is for the recovery of demand, whenever that happens. If you believe things will normalize and people will begin flying again, the demand for oil will return to similar levels as pre-covid. When it does return, the supply side of the business which has been severely damaged, will not have the capital or the ability to respond the way it has over the last decade. This is why the companies that remain in the game will be beneficiaries of much higher commodity prices and this time, will have a much improved cost structure and capital discipline to provide high returns to shareholders. If or when that happens, institutions will have a much tougher decision to make on whether they want to sacrifice returns by not owning 'dirty oil' for ESG reasons.
Yes, B7, some points you make are why I continue to have some "interest" in the sector. Many discuss "Demand destruction" but I agree the focus should be on "Supply destruction". Without investment, real supply/demand economics should reappear. Price volatility definitely became forefront (last 5 years especially) when US Shale production became an issue for global producers. We are only now seeing the dismantling of over-levered US producers which should ultimately (hopefully from a price perspective) wash out "some" uneconomic US production and improve $WTI. I think some have unrealistic expectations of where Crude prices are sustainable. In March, I was purchasing oil stocks & direct commodity derivatives because $20 WTI is simply not sustainable regardless of sector out-of-favour. Likewise, a $100+ WTI was never realistic either.

A long-term (70 Year) Chart shows that the basic median price has been $50 WTI. Periods above / below are largely anomalies but clearly for almost a 20 year period (1950's>70's), oil pricing was largely stagnant.

70 Year Oil Price Chart_MacroTrends

Additionally, I fit O&G's into my lower $USD outlook. While Gold anticipates the same, other commodities should benefit as well in this event.
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In an interview in 1989, the University of Houston economist Barton Smith said the oil boom of the 1970s and early '80s caught the city by surprise, and it perhaps grew too far, too fast, which intensified the bust.

"But we've learned a lesson," he told the Houston Chronicle. "All we need to do is remember it."
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Using the auto-regression tool, the 37-year Oil/Gold ratio mean regression comes in at about .065

oil gold ratio.png

As I post this the oil/gold ratio is .019 which is way out of whack.
Oil is too cheap; gold is too dear. (Buy sheep sell deer:)

Here are some prices that oil and gold would have to reach to arrive at the mean ratio of .065

oil gold table.png

Click on images to enlarge.
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Jul 30, 2012
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IrwinW wrote: Using the auto-regression tool, the 37-year Oil/Gold ratio mean regression comes in at about .065

As I post this the oil/gold ratio is .019 which is way out of whack.
Oil is too cheap; gold is too dear. (Buy sheep sell deer:)

Here are some prices that oil and gold would have to reach to arrive at the mean ratio of .065

oil gold table.png
Click on images to enlarge.
Interesting, but I don't really view Oil & Gold related other than through movements of the $USD. Gold acts like a Currency (there is not a specified need for the commodity), Oil not so much. Unfortunately, Oil price dynamics are more complex than Gold in the sense that true Supply/Demand fundamentals, along with currency, & IR's all affect the ultimate Spot/Futures on Oil. During periods of market corrections, oil has proven to retrench violently because of it's Supply/Demand "real" economy characteristics & IR crashes.

I think Oil can benefit from a lower $USD (as Gold) but I personally wouldn't sell one to replace the other. For years, Natural Gas/Oil were correlated (related / closer to the same fundamentals) but those ratios have blown out over the years as well.
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@DealRNothing
I just put that oil/gold ratio out there as food for thought. It being a long-term chart, it could easily take five years for the ratio to revert to the mean.

Listening to Walter Deemer's webcast, he made an interesting comment at about 52 minutes. "Energy stocks will outperform FANGs over the next couple years".
He might well be correct given that "energy" is more than hydrocarbons, and the sector could take off while oil continues to languish.

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Sep 23, 2016
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brutal day again... at least I made $1 back tax free from playing aisles of glory hahaFace With Tears Of Joy
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IrwinW wrote: @DealRNothing
I just put that oil/gold ratio out there as food for thought. It being a long-term chart, it could easily take five years for the ratio to revert to the mean.

Listening to Walter Deemer's webcast, he made an interesting comment at about 52 minutes. "Energy stocks will outperform FANGs over the next couple years".
He might well be correct given that "energy" is more than hydrocarbons, and the sector could take off while oil continues to languish.
I won't make a prediction for the next few years, but I have been Short Tech (Nasdaq) for several weeks now and Long (underweight) Energy. I do in-depth (long term tracking) Fundamental work on individual stocks/sectors. Almost all fundamental markers point to a significant over-valuation in Tech. My hesitation with a "Full" Energy (Oil) weighting is institutional investment (ESG) sentiment as I've posted before as well as current US Shale "over" production (I would need to see well under 9.9M boepd sustainably before becoming "bullish"). I remember several years ago, Uranium was considered extremely undervalued and would "have to pop". The interest in the sector simply hasn't materialized regardless of depressed valuations (for a variety of reasons). I'm "hopeful" Oil does not follow the same path.

I am not anti-renewable energy and do have positions in that space but I cannot justify current sector valuation(s). Largely driven up by the institutional ESG mandates.

EDIT: I just noticed in a thread you favour Uranium, Irwin, lol... no offense, Winking Face
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DealRNothing wrote: (...)
EDIT: I just noticed in a thread you favour Uranium, Irwin, lol... no offense, 😉
No offense taken. It isn't so much that I like uranium, although it's miles ahead of horse & mule power; been there - done that. What anti-energy folks like Elizabeth May seem to miss is that there are a couple billion women world wide who still carry water in buckets every day for their family, and wash clothes by hand. They are happy to entertain any concept of energy which will power a water pump and run a washing machine; pollution be damned.

Because Canada has so much uranium, governments - Fed and Provincial - favour conventional reactors using uranium. My hope is that countries which don't have abundant uranium will gradually turn to Molten Salt / Thorium Reactors as the pressure builds to go cleaner and greener.

Here's a good introduction to Thorium for those who are unfamiliar with the topic.

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Jul 30, 2012
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IrwinW wrote: Because Canada has so much uranium, governments - Fed and Provincial - favour conventional reactors using uranium. My hope is that countries which don't have abundant uranium will gradually turn to Molten Salt / Thorium Reactors as the pressure builds to go cleaner and greener.

Here's a good introduction to Thorium for those who are unfamiliar with the topic.
Thanks for the Thorium post, Irwin... Never heard of this before... Always a student... While it seems to be "less" dangerous form of fusion, looks like there are still challenges. Looks like lithium is a requirement which already appears to be in shortage due to rechargeable battery technology (so far) although cobalt seems to becoming more reviewed. After some research, it appears this was first initiated in the 60's. Definitely, your post is the first to have brought it to my attention... thanks!
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My portfolio has a scary amount of Oil/energy based stocks, followed by tourism stocks (1/3rd of portfolio) .. even with all the decrease recently for the most part im not loosing money, but my problem is i like high risk plays and i keep end up being oil stocks 🤣 i plan to hold these for awhile but some of these do scare me a bit.

CHW $5590 43% profit
drt 2380 48% profit
ipo 2000 169% profit
scl 12360 10% loss
SHLE $1000 7% profit
Vet $2017 1% profit
cfw 4240 33% loss
cve $7000 77% profit
esi 2440 22% profit
exn 2112 111% profit
ses 1300 20% loss
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Jruuu wrote: If this is true, the west is f'ed. They have no time to pivot away and diversify their economy.
5 words mean there is still plenty of time: demand - broadly - flat - two - decades
... the firm's most bullish scenario sees demand no better than "broadly flat" for the next two decades ...
~SeekingAlpha
oil demand.png
Member
Jul 30, 2012
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Jruuu wrote: If this is true, the west is f'ed. They have no time to pivot away and diversify their economy.
The ongoing mantra by institutions and renewable sector is Oil is "over". The theme is always based on an oil glut thesis that will remain regardless of Fundamentals. There is no question the desire is to move off fossil fuels over the longer term but a true supply response (based on economics) by the Oil sector may disrupt the transition timeline. i.e. Oil supply may not meet consumption during the transition because of a lack of sector investment. Will Oil prices remain low in light of a possible supply crunch? Or will true Supply/Demand theory re-enter the oil market.

Most take for granted the ongoing supply at any price, but I personally don't. I suspect the opposite will re-appear as in the 70's. Oil prices could rise in light of supply crunches and the Federal Gov't response could be price controls of Canadian Oil.

Ironically, the Feds make every effort to crush Carbon sales in Canada but it is a major source of tax revenue at the pump & through carbon taxes with no near-term renewable tax replacement. The Feds are not ready for an ongoing collapse in fossil fuels, let alone Western Canada. So if you believe W. Canada is f'ed (to use your term, lol), you should be worried about Canada as a whole.

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