Only four of the companies in our Large-Cap Growth Portfolio are trading today in the upper half of their 52-week ranges: Concho Resources (CXO), Continental Resources (CLR), EOG Resources (EOG) and Diamondback Energy (FANG).
No doubt, these four companies are solid and have a lot of running room, but so are the other 12 companies.
Plus, all of the upstream oil & gas companies we follow are in much better shape today than they were a year ago. So, why is the Wall Street Gang not moving more money into these high quality upstream companies?
1. FEAR: This oil price cycle has been much worse and lasted much longer than previous cycles. Wall Street analysts are afraid to recommend upstream oil & gas companies when they fear an oil price pullback might come the next morning. I guess it is easier to recommend buying Bitcoin in your IRA even though no one on earth can explain the valuation.
2. There is not much confidence in OPEC + Russia sticking with their production quotas, despite the fact that they have actually been quite disciplined. In my opinion, OPEC + Russia must push up oil prices if they wish to survive. Even Saudi Arabia cannot survive Brent under $70 for more than a few more years. 2/3s of the OPEC nations are already bankrupt.
3. Wall Street still thinks the U.S. shale oil producers will ramp up production each time they can hedge oil over $50. Per EIA: U.S. crude oil production rose by 25,000 barrels per day (bpd) last week to 9.71 million barrels per day, bringing output close to levels of top producers Russia and Saudi Arabia. Early this year, the EIA predicted that U.S. oil production would top 10.0 million barrels per day by December 31st. Obviously that isn’t going to happen. My swag is that it will be difficult for the U.S. to get to and maintain production over 10.0 million barrels per day, unless oil prices go a lot higher. Global demand for oil will continue to go up by 1,500,000 barrels per day year-after-year and there is no way that the United States can keep up with the global rate of demand growth on its own.
4. Fear that electric vehicles will destroy demand for gasoline. My swag: Twenty years from now EVs will still be less than 10 percent of the vehicles on the road. Plus, no one knows where the battery materials are coming from even to make that happen. I am very bullish on a few lithium companies, especially Nemaska Lithium (NMKEF). I think the home market for power storage is much larger than the vehicle market.Related: Gas Shortage Has China Backtracking On Coal Ban
So, what will it take for Wall Street to wake up? Answer: a "Paradigm Shift"
A paradigm shift occurs when the under-lying assumptions that a person is basing their actions on are proven or perceived to be wrong. New assumptions cause a change in behavior.
Here is what I believe will cause a Paradigm Shift on Wall Street with regard to investing in upstream oil & gas companies:
1. Within six months, OECD oil in storage will dip below the 5-year average. There is already less than 30-days’ supply of oil in OECD storage, which is more important than the 5-year average.
2. Each year there is a big increase in demand for oil in the second quarter. 2018 will be no different than previous years. U.S. inventories of refined products are low today, so refinery utilization should remain high (93.8 percent per yesterday's EIA report, compared to 90.4 percent a year ago). Winter has arrived in the Northeast U.S. an area that still burns a lot of oil for space heating.
3. The technical pattern for oil confirms strong support level at $55. This morning WTI moved briefly below $56 and then moved higher. In my opinion, the higher lows on each pullback since June 21st (when WTI dipped to $42) are very bullish.
Hang tough: It only takes a few Wall Street firms recommending rotation into the energy sector and "The Herd" will follow.
By Dan Steffens for Oilprice.com
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