Macro Dashes – The Last Oil Bull Market Is Here – So What

Summary

  • Oil finally reached $80 per barrel after years of OPEC manipulation and hundreds of U.S. oil bankruptcies.
  • The current oil rally is destined to be short lived as OPEC nations face two harsh realities.
  • Oil demand growth is set to plateau in the next several years before falling in the 2030s.
  • Any rise in oil prices from here will propel substitution even faster through more EVs, diesel and jet fuel being made from captured carbon and and plastics are finding new feedstocks.
  • This could be a last chance to rotate out of most oil stocks before there is another round of shrinkage in the space.

Oil is in what I believe will be its last significant bull market. The EV revolution will be kicking into full swing by about 2026 or 2027 based on environmental rules and there are emerging substitutes for oil as feedstock to plastics, chemicals and fuels. None of those things can be stopped or even slowed much in my opinion. 

OPEC, Saudi Arabia in particular, which I have discussed in several interviews and articles, is the main beneficiary of higher oil prices. But, they know, as does Russia, that we are now well into the beginning of the end of the oil age that I discussed on MarketWatch way back in 2015, and, on the cusp of middle innings. 

OPEC and Russia’s dilemma is how to maximize their oil (and gas) profits as clean energy becomes reality. On one hand, if they hold back on oil supply and allow oil prices to rise too high, it will incentivize the transition away from fossil fuels, short-term competition from non-OPEC producers and an economic slowdown that hits demand. If they put too much oil into the markets, they will not maximize their income while they can. It is a delicate balance.

This is why during an interview with Forex Analytix a few weeks ago, I said I expect oil to be range bound between the middle $50s and middle $70s per barrel (with usual potential for very short periods outside that range). The combination of a range bound price of oil and lack of increased volumes for U.S. producers means that only the strongest will avoid significant shrinkage in coming years. 

Shrinkage

Oil’s Rise, Fall, Rise, Fall, Rise…

They say that the cure for higher oil prices is higher oil prices. I wouldn’t expect that to be any different this time. 

In October of 2017, when oil was under $50 per barrel, I said oil would rise to $80 in the intermediate term. I was just about spot on about a year later, when President Trump did something both unexpected, and frankly, at least politically, brilliant. He backed off of the Iran sanctions in Autumn 2018 which caused oil prices to plummet. 

The Iran move directly hurt most of OPEC, Saudi Arabia in particular. It also crushed the U.S. oil industry again in a dramatic blow that led to another huge wave of bankruptcies and permanent loss of labor. Those bankruptcies have permanently hampered U.S. oil production along with the remaining companies cutting back dramatically on exploration and development in an attempt to save their balance sheets.

What we are left with is an oil market where Saudi Arabia and a few other nations are the swing producers in oil.

What’s Next For Oil?

Even after the second collapse of oil prices in 2018 (2014-15, 2018, 2020), I wrote this: 

Here’s Why Oil Is Headed To $80

And here we are sniffing $80 per barrel oil again just 7 quarters later.

Right about now, OPEC is faced with an interesting decision. Either produce more oil or see the United States and China both tap their strategic petroleum reserves which are filled to the brim. 

China in fact has already made some reserves available to refiners. 

China to Sell First Batch of Crude Oil From Reserves on Sept. 24

It will not take much for the United States to follow suit. In fact, I expect it just before winter sets in if OPEC doesn’t announce a more significant increase in production than is expected at their upcoming meeting November 4th. 

Either way, we should see more oil in the market soon. That will place an effective cap on the price of oil short of a new conflict or damaging event in the region. 

The Long-term For Oil

I get tired of trotting out the numbers, but it is pretty clear, we are about to hit peak oil demand around middle to late decade. Here is BP’s outlook with three different scenarios.

Liquid fuels consumption

Oil | Energy economics | BP

Notice that even their most oil intensive outlook sees oil demand peaking around 2030. 

I expect the rapid transition to be the most likely path to lower oil demand. The net zero is the second most likely with China, India, Europe and America agreeing to cooperate with guidelines to prevent economic disadvantages, i.e. incentives to cheat.

Why does my analysis show that the rapid path is most likely? Well, as we are seeing with one of our recent investments, Aemetis (AMTX) around $10 per share, the move away from oil with creative alternatives is already happening. 

Aemetis is using captured carbon from dairy farms to essentially recycle it into jet fuel. They have pipeline deals and a contract with Delta (DAL). This is no far off into the future thing. It’s now and growing fast.

From my July 19 members only piece: 

And from my September 20 piece “So you say you wanted a “do over.”

A private company called Newlight Technologies has created something called AirCarbon which allows it to capture carbon from farms, power plants and waste treatment facilities to produce a type of plastic. One of its biggest investors was a private equity firm affiliated with a petrochemical producer. AirCarbon is past proof of concept and recently began to demonstrate economic efficiency. It’ll start scaling soon.  

There’s more companies out there as well combining carbon capture with what is recycling the carbon into fuels, plastics, lubricants, etc…

In addition, consider all the moves towards hydrogen. After I attended CES in 2020, I told subscribers the two specific areas we will see hydrogen become a big deal: heavy transportation, i.e. trucks, ships and trains, as well as, utility scale energy storage. It was one of the key topics among energy and transportation executives and engineers. 

Anyone holding onto the fantasy that oil demand growth will suddenly accelerate above 1% again versus continuing to flatten then fall soon, simply hasn’t studied what is going on in the energy transition, and/or would rather hold onto the past than look to the future and/or is weirdly biased. 

Impact On U.S. Oil Companies

The impact of flat to falling oil demand in the next decade is going to be catastrophic to most U.S. oil producers. I agree with Pioneer Resources (PXD) CEO Scott Sheffield that there are only about five viable U.S. oil companies – Pioneer being my favorite to weather the coming storms for several key reasons, but still not a buy at today’s prices. 

But, let’s not argue about which companies will go kaput. It’ll be a lot of them. And, even if they do well for a while, here’s something to consider, if oil stocks do well, alternative energy stocks will do better. Why is that?

For oil stocks to do well, they will need higher prices for longer. If that happens, cleaner energy becomes even more competitive.

At this point, by most accounts alternative energy and fossil fuels are roughly at parity now, higher oil prices would make clean energy cheaper. What does that look like? Well, pretty much what it has looked like the recent past. 

5 year time frame clean energy ETFs Invesco Clean Energy (PBW), Invesco Solar (TAN) and iShares Global Clean Energy (ICLN) versus SPDR Select Energy (XLE) and SPDR Oil & Gas E&P (XOP): 

2 years: 

Since Coronavirus Crash and QE Infinity Rally: 

In that last chart you see that the E&Ps, largely fueled by Pioneer and some gas plays has almost kept up with clean energy. Do you really expect that to last? 

You also see that oil majors and other large oil and gas related companies still can’t keep up. Do you expect that to change? 

So, here’s the 411, it doesn’t really matter what oil does short or long-term. The oil companies are going to suffer from poor relative performance over most time periods probably until there’s about five left as Pioneer Sheffield has suggested. Why own them? I have no idea.

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