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Last Updated: June 1, 2016
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The energy sector was certainly a bargain in January, but no one really knows where oil will be around Christmas. While we may have already seen the bottom, stock prices are not the bargain they were.

There are other plays. Think electric vehicles and even driverless cars. Find what's undervalued now and get in on some of the games that will dictate glorious future wealth.

Oilprice.com's James Stafford recently interviewed Mike 'Mish' Shedlock, an award-winning economic commentator who has been providing investment advice for years.

In this interview, Mish discusses:

• The oil bounce

• The confluence of events that brought oil down

• The manufacturing recession

• The battery revolution

• Lithium, EVs, and driverless cars

• Demographics

JS: What do you see as being next for oil prices? Is the rally here to stay? Where do you see oil prices at Christmas?

Mish: I certainly don't know, and no one else does either.

Early this year, many resource plays were massively undervalued and priced for possible bankruptcy. Had I known the precise timing, I would have sold everything 2-3 years ago and bought in December.

My intent was to buy a lot of energy companies when oil dropped into the 30s. I didn't. Instead, gold miners and other resources were a bargain at the same time. I did pick up more of those.

In regards to oil, there are a lot of companies still going bankrupt. With the slowing global economy, oil prices may simply level off here. I am inclined to think that the bottom may be in, but one never knows with these political pushes against petroleum and fossil fuels.

It's interesting that when oil fell from US$100 to US$80 to US$70 to US$60, people kept saying the bottom was in, every time oil bounced a few bucks.

I was thinking US$35-45. Oil went even lower. Then when oil broke US$30, people threw in the towel. Writers started talking about oil in the teens!

The same thing happened in gold. When gold fell from US$1,900 to US$1,050 people started talking about gold in the US$600 range again.

Neither oil nor is gold is going to zero.

The best energy plays are companies that have little debt and are profitable at or near current levels. They will survive another trip south in oil prices. Debt leveraged companies may not.

JS: Do you buy into the theory that Saudi Arabia has been pursuing a strategy to bankrupt the US energy sector and maintain its own market share?

Mish: No. We had a confluence of numerous things made for a 'perfect storm' in the oil sectors.

1. The Fed drove down interest rates to ridiculously low levels.

2. Companies saw an opportunity to get cheap financing and they got it.

3. Extraction technology improved.

4. President Obama worked out a deal with Iran to end the embargo. This added to global oil supply.

5. Cash strapped Russia pumped more oil to support its economy in the wake of EU and US sanctions.

6. Growth in China slowed.

Drill baby drill!

The US drilled like mad and so did everyone else.

Despite the crash in oil, production in the US dropped only 6%, maybe 8%. So we have huge numbers of bankruptcies already filed and pending, and companies are struggling—yet, they are all still pumping.

The Fed kept these companies alive artificially.

JS: What do you see happening at the June OPEC meeting?

Mish: A lot of talk and nothing else. We see the same thing with trade discussions. Every year there are two rounds of trade discussions and nothing ever happens.

Even the Trans-Pacific-Partnership (TPP), looks like its dying on the vine. It will die if Trump is elected, maybe even if Clinton is. She stated on 45 occasions while in office that she was for it. Now, she isn't.

TPP is a massive monstrosity, all done in secret. Few have read it outside those working on the deal. Only 20% of it relates to trade. I believe a proper trade agreement would be to drop all tariffs and stop all subsidies regardless of what anyone else did.

Any country that did that would see investment pour in. But no one wants to try that. Everyone claims they are for free trade except when it hurts their exports.

So here we are. This is another one of those "we have to pass the bill to find out what's in it kind of things." No thanks!

I have written about the TPP many times, here's a pair of them:

Obama's Trans-Pacific Partnership Fiasco vs. Mish's Proposed Free Trade Alternative; How Will TPP Function in Practice?

Hillary Clinton, Dead Rats, Toilet Paper Politics

JS: Over the last few weeks we've seen an increase in demand and many supply outages. Is this the end of the glut or will it hang over the market for a while?

Mish: Supply will hang over the market for a long time to come. China is slowing way more than people realise. What little rebound there was in Europe appears to be on its last legs.

The oil market crashed to take falling demand into consideration, likely overshooting. The rebound is to a more natural level. If I had to guess a range, I would say a US$35-US$45 range. It could be higher. I have no bets on it.

JS: Goldman Sachs' top-end estimate is US$60 or above. How would that impact the economy?

Mish: Let's approach that question from the opposite direction.

All the people who said that falling and low oil prices are "unambiguously good for the economy" were wrong. If oil rebounds to US$65, then maybe my idea that the global economy is slowing rapidly is wrong. But US$65 or higher could also happen with some sort of war-caused supply squeeze in the Middle East or if OPEC and Russia voluntarily made huge cuts in production.

In general, if oil is going up in the absence of a supply shock, then it usually means the global economy is improving.

The dip below US$30 was likely an overshoot. If so, the subsequent rebound to the mid-US$40s was just a bottoming event. Judgments need to be based on what happens next, not a rebound from the depths of hell.

Europe has huge migration problems and voters are fed up. You see it in the rise of some fringe parties all across Europe. In the US, Donald Trump beat all expectations. If the economy was really doing well, people would not be so angry everywhere you look.

JS: How big of a stimulus do you think low oil prices have had on the economy?

Mish: At best, little to none, and more likely negative. The economists thought that people would go and spend all their gasoline savings on consumer goods but that didn't happen. Instead, the savings rate rose. People did spend more on rising rents and rising healthcare costs, not where the Fed wanted consumers to spend.

We lost a lot of high paying jobs in the energy sector and some of the local economies are struggling. The net effect of all of this was certainly negative as it played out. Last month, we saw a good report or two in manufacturing, but they went down again this month. Manufacturing is undoubtedly still in a recession.

JS: What about renewables, and particularly, battery technology? If battery technology improves rapidly, and the introduction of driverless cars 'accelerates', would oil be hit hard?

Mish: It could, but the timeline is in question. I don't think a massive switch to batteries will happen any time soon in most consumer cars. There are plenty of variables here and more questions than answers—especially when it comes to time frame and reverberations.

Are people going to stop buying cars and go to Uber? Are those cars going to be battery, gasoline, or hybrids of some sort? I don't know.

I propose a phased progression.

First, long haul truck driver jobs will vanish, then taxi driver jobs will vanish. The time when the average person in the city says: "I don't need my own car anymore" remains to be seen.

JS: How do demographics fit into the picture? Demographically speaking, millennials don't see things the same way as the boomers do.

Mish: Millennials don't care much about cars - they're content to do other things that aren't as energy intensive as their parents did. They don't want big houses as they've seen their parents lose houses to debt. They live with parents and don't eat out as much. This all cuts into demand energy.

So does a mountain of debt. Yet the economists are still trying to figure out why the economy is growing slowly.

As of 31 March, 2016, total household indebtedness (in the US) was US$12.25 trillion, a US$136 billion (1.1%) increase from the fourth quarter of 2015. Overall household debt remains 3.3% below its 2008 Q3 peak of US$12.68 trillion.

Check out the trend in mortgage debt vs. the trend in student loan debt. The two items are not unrelated. Household formation is low because of student debt, boomer demographics, and changing attitudes of millennials.

JS: Outside of gold, where do you see undervalued investments?

MS: I like Lithium but some of the plays in that space have had a big run-up. There could be a pullback. In terms of market timing for batteries, three to four years away may as well be light-years from now. The markets typically don't care much about things more than a year away.

JS: How close are we getting to a real breakout with autonomous trucking, which you've written about recently?

MS: Four ex-Google engineers broke away and started their own Driverless Vehicle Company Called "Otto".

They've been testing driverless trucks in Nevada without a backup driver. The 'Otto' approach is a little different: They retro-fit existing trucks with their technology. The clincher is that 'Otto' will soon be commercially ready.

I've bumped up my timeline for driverless trucks from 2020 to 2019. I now expect we will lose millions of jobs by 2022 instead of 2024.

JS: Do you see the EV revolution taking place sooner than many are projecting?

MS: I do, and I've bought a couple of lithium stocks. But yes, I believe people need to look outside of gold and energy as to how this will take hold.

My opinion on these things is if it takes a government subsidy to work then it doesn't work. And we are not seeing subsidies going into this industry (unlike wind for example).

The free market seems to be adapting on its own to deal with emission issues.  

By: James Stafford, Oilprice.com, 30 May 2016

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The Battle for Anadarko

At first, it seemed like a done deal. Chevron made a US$33 billion offer to take over US-based upstream independent Anadarko Petroleum. It was a 39% premium to Anadarko’s last traded price at the time and would have been the largest industry deal since Shell’s US$61 billion takeover of the BG Group in 2015. The deal would have given Chevron significant and synergistic acreage in the Permian Basin along with new potential in US midstream, as well as Anadarko’s high potential projects in Africa. Then Occidental Petroleum swooped in at the eleventh hour, making the delicious new bid and pulling the carpet out from under Chevron.

We can thank Warren Buffet for this. Occidental Petroleum, or Oxy, had previously made several quiet approaches to purchase Anadarko. These were rebuffed in favour of Chevron’s. Then Oxy’s CEO Vicki Hollub took the company jet to meet with Buffet. Playing to his reported desire to buy into shale, Hollub returned with a US$10 billion cash infusion from Buffet’s Berkshire Hathaway – which was contingent on Oxy’s successful purchase of Anadarko. Hollub also secured a US$8.8 billion commitment from France’s Total to sell off Anadarko’s African assets. With these aces, she then re-approached Anadarko with a new deal – for US$38 billion.

This could have sparked off a price war. After all, the Chevron-Anadarko deal made a lot of sense – securing premium spots in the prolific Permian, creating a 120 sq.km corridor in the sweet spot of the shale basin, the Delaware. But the risk-adverse appetite of Chevron’s CEO Michael Wirth returned, and Chevron declined to increase its offer. By bowing out of the bid, Wirth said ‘Cost and capital discipline always matters…. winning in any environment doesn’t mean winning at any cost… for the sake for doing a deal.” Chevron walks away with a termination fee of US$1 billion and the scuppered dreams of matching ExxonMobil in size.

And so Oxy was victorious, capping off a two-year pursuit by Hollub for Anadarko – which only went public after the Chevron bid. This new ‘global energy leader’ has a combined 1.3 mmb/d boe production, but instead of leveraging Anadarko’s more international spread of operations, Oxy is looking for a future that is significantly more domestic.

The Oxy-Anadarko marriage will make Occidental the undisputed top producer in the Permian Basin, the hottest of all current oil and gas hotspots. Oxy was once a more international player, under former CEO Armand Hammer, who took Occidental to Libya, Peru, Venezuela, Bolivia, the Congo and other developing markets. A downturn in the 1990s led to a refocusing of operations on the US, with Oxy being one of the first companies to research extracting shale oil. And so, as the deal was done, Anadarko’s promising projects in Africa – Area 1 and the Mozambique LNG project, as well as interest in Ghana, Algeria and South Africa – go to Total, which has plenty of synergies to exploit. The retreat back to the US makes sense; Anadarko’s 600,000 acres in the Permian are reportedly the most ‘potentially profitable’ and it also has a major presence in Gulf of Mexico deepwater. Occidental has already identified 10,000 drilling locations in Anadarko areas that are near existing Oxy operations.

While Chevron licks its wounds, it can comfort itself with the fact that it is still the largest current supermajor presence in the Permian, with output there surging 70% in 2018 y-o-y. There could be other targets for acquisitions – Pioneer Natural Resources, Concho Resources or Diamondback Energy – but Chevron’s hunger for takeover seems to have diminished. And with it, the promises of an M&A bonanza in the Permian over 2019.

The Occidental-Anadarko deal:

  • US$38 billion cash-and-stock
  • Oxy will received a US$10 billion injection from Berkshire Hathaway
  • Oxy will sell US$8.8 billion of assets in Africa to Total
  • Chevron receives a US$1 billion break-up fee
May, 23 2019
Venezuelan crude oil production falls to lowest level since January 2003

monthly venezueal crude oil production

Source: U.S. Energy Information Administration, Short-Term Energy Outlook

In April 2019, Venezuela's crude oil production averaged 830,000 barrels per day (b/d), down from 1.2 million b/d at the beginning of the year, according to EIA’s May 2019 Short-Term Energy Outlook. This average is the lowest level since January 2003, when a nationwide strike and civil unrest largely brought the operations of Venezuela's state oil company, Petróleos de Venezuela, S.A. (PdVSA), to a halt. Widespread power outages, mismanagement of the country's oil industry, and U.S. sanctions directed at Venezuela's energy sector and PdVSA have all contributed to the recent declines.

monthly venezuela crude oil rig count

Source: U.S. Energy Information Administration, based on Baker Hughes

Venezuela’s oil production has decreased significantly over the last three years. Production declines accelerated in 2018, decreasing by an average of 33,000 b/d each month in 2018, and the rate of decline increased to an average of over 135,000 b/d per month in the first quarter of 2019. The number of active oil rigs—an indicator of future oil production—also fell from nearly 70 rigs in the first quarter of 2016 to 24 rigs in the first quarter of 2019. The declines in Venezuelan crude oil production will have limited effects on the United States, as U.S. imports of Venezuelan crude oil have decreased over the last several years. EIA estimates that U.S. crude oil imports from Venezuela in 2018 averaged 505,000 b/d and were the lowest since 1989.

EIA expects Venezuela's crude oil production to continue decreasing in 2019, and declines may accelerate as sanctions-related deadlines pass. These deadlines include provisions that third-party entities using the U.S. financial system stop transactions with PdVSA by April 28 and that U.S. companies, including oil service companies, involved in the oil sector must cease operations in Venezuela by July 27. Venezuela's chronic shortage of workers across the industry and the departure of U.S. oilfield service companies, among other factors, will contribute to a further decrease in production.

Additionally, U.S. sanctions, as outlined in the January 25, 2019 Executive Order 13857, immediately banned U.S. exports of petroleum products—including unfinished oils that are blended with Venezuela's heavy crude oil for processing—to Venezuela. The Executive Order also required payments for PdVSA-owned petroleum and petroleum products to be placed into an escrow account inaccessible by the company. Preliminary weekly estimates indicate a significant decline in U.S. crude oil imports from Venezuela in February and March, as without direct access to cash payments, PdVSA had little reason to export crude oil to the United States.

India, China, and some European countries continued to receive Venezuela's crude oil, according to data published by ClipperData Inc. Venezuela is likely keeping some crude oil cargoes intended for exports in floating storageuntil it finds buyers for the cargoes.

monthly venezuela crude oil exports by destinatoin

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, and Clipper Data Inc.

A series of ongoing nationwide power outages in Venezuela that began on March 7 cut electricity to the country's oil-producing areas, likely damaging the reservoirs and associated infrastructure. In the Orinoco Oil Belt area, Venezuela produces extra-heavy crude oil that requires dilution with condensate or other light oils before the oil is sent by pipeline to domestic refineries or export terminals. Venezuela’s upgraders, complex processing units that upgrade the extra-heavy crude oil to help facilitate transport, were shut down in March during the power outages.

If Venezuelan crude or upgraded oil cannot flow as a result of a lack of power to the pumping infrastructure, heavier molecules sink and form a tar-like layer in the pipelines that can hinder the flow from resuming even after the power outages are resolved. However, according to tanker tracking data, Venezuela's main export terminal at Puerto José was apparently able to load crude oil onto vessels between power outages, possibly indicating that the loaded crude oil was taken from onshore storage. For this reason, EIA estimates that Venezuela's production fell at a faster rate than its exports.

EIA forecasts that Venezuela's crude oil production will continue to fall through at least the end of 2020, reflecting further declines in crude oil production capacity. Although EIA does not publish forecasts for individual OPEC countries, it does publish total OPEC crude oil and other liquids production. Further disruptions to Venezuela's production beyond what EIA currently assumes would change this forecast.

May, 21 2019
Your Weekly Update: 13 - 17 May 2019

Market Watch

Headline crude prices for the week beginning 13 May 2019 – Brent: US$70/b; WTI: US$61/b

  • Crude oil prices are holding their ground, despite the markets showing nervousness over the escalating trade dispute between the USA and China, as well as brewing tensions in the Middle East over the Iranian situation
  • China retaliated against President Trump’s decision to raise tariffs from 10% to 25% on US$200 billion worth of Chinese imports by raising its own tariffs; crucially, China has also slapped taxes on US LNG imports at a time when American export LNG projects banking on Chinese demand are coming online
  • In the Middle East, Saudi Arabia reported that two of its oil tankers were attacked in the Persian Gulf, with the ‘sabotage attack’ near the UAE speculated to be related to Iran; with the US increasing its military presence in the area, the risk of military action has escalated
  • The non-extension of US waiver on Iranian crude is biting hard on Iran, with its leaders calling it ‘unprecedented pressure’, setting the stage for a contentious OPEC meeting in Vienna
  • In a move that is sure to be opposed by Iran, Saudi Arabia has said it is willing to meet ‘all orders’ from former Iranian buyers through June at least; Saudi Aramco is also responding to requests by Asian buyers to provide extra oil
  • The see-saw trend in US drilling activity continues; after a huge gain two weeks ago, the active US rig count declined for a second consecutive rig, with the loss of two oil rigs bringing the total site count to 988, below the equivalent number of 1,045 last year
  • There is considerably more upside to crude prices at the moment, with jitters over the health of the global economy and a delicate situation in the Middle East likely to keep Brent higher at US$71-73/b and WTI at US$62-64/b


Headlines of the week

Upstream

  • Occidental Petroleum and Warren Buffet have triumphed, as Chevron bowed out of a bidding war for Anadarko Petroleum; Occidental will now acquire Anadarko for US$57 billion, up significantly from Chevron’s US$33 billion bid
  • The deal means that Occidental’s agreement to sell Anadarko’s African assets to Total for US$8.8 billion will also go through, covering the Hassi Berkine, Ourhoud and El Merk fields in Algeria, the Jubilee and TEN fields in Ghana, the Area 1 LNG project in Mozambiuqe and E&P licences in South Africa
  • BP has sanctioned the Thunder Horse South Expansion Phase 2 deepwater project in the US Gulf of Mexico, which is expected to add 50,000 boe/d of production at the Thunder Horse platform beginning 2021
  • Africa is proving to be very fruitful for Eni, as it announced a new gas and condensate discovery offshore Ghana; the CTP-Block 4 in the Akoma prospect is estimated to hold some 550-650 bcf of gas and 18-20 mmbl of condensate
  • In an atypical development, South Africa has signed a deal for the B2 oil block in South Sudan, as part of efforts to boost output there to 350,000 b/d
  • Shell expects to drill its first deepwater well in Mexico by December 2019 after walking away with nine Mexican deepwater blocks last year

Midstream & Downstream

  • China’s domestic crude imports surged to a record 10.64 mmb/d in April, as refiners stocked up on an Iranian crude bonanza due to uncertainty over US policy, which has been confirmed as crude waivers were not renewed
  • Having had to close the Druzhba pipeline and Ust-Luga port for contaminated crude, Russia says it will fully restore compliant crude by end May shipments, including cargoes to Poland and the Czech Republic
  • Mexico’s attempt to open up its refining sector has seemingly failed, with Pemex taking over the new 340 kb/d refinery as private players balked at the US$8 billion price tag and 3-year construction deadline
  • Ahead of India’s move to Euro VI fuels in April 2020, CPCL is partially shutting down its 210 kb/d Manali refinery for a desulfurisation revamp
  • China’s Hengli Petrochemical is reportedly now stocking up on Saudi Arabian crude imports as it prepares to ramp up production at its new 400 kb/d Dalian refinery alongside its 175 kb/d site in Brunei
  • South Korea’s Lotte Chemical Corp expects its ethane cracker in Louisiana to start up by end May, adding 1 mtpa of ethylene capacity to its portfolio
  • Due to water shortage, India’s MRPL will be operating its 300 kb/d refinery in Katipalla at 50% as drought causes a severe water shortage in the area

Natural Gas/LNG

  • Partners in the US$30 billion Rovuma LNG project in Mozambique now expect to sanction FID by July, even after a recent devastating cyclone
  • Also in Mozambioque, Anadarko is set to announce FID on its Mozambique LNG project on June 18, calling it a ‘historic day’
  • After talks of a joint LNG export complex to develop gas resources in Tanzania, Shell and Equinor now appear to be planning separate projects
  • Gazprom has abandoned plans to build an LNG plant in West Siberia to compete with Novatek, focusing instead on an LNG complex is Ust-Luga
  • First LNG has begun to flow at Sempra Energy’s 13.5 mtpa Cameron LNG project in Louisiana, with exports expected to begin by Q319
May, 17 2019