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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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Myanmar’s Coup and Repercussions to Its Oil Industry

It was a good run while it lasted. Almost exactly a decade ago, the military junta in Myanmar was dissolved, following civilian elections. The country’s figurehead, Aung San Suu Kyi, was released from house arrest to lead, following in the footsteps of her father. Although her reputation has since been tarnished with the Rohingya crisis, she remains beloved by most of her countrymen, and her installation as Myanmar’s de facto leader lead to a golden economic age. Sanctions were eased, trade links were restored, and investment flowed in, not least in the energy sector. Yet the military still remained a powerful force, lurking in the background. In early February, they bared their fangs. Following an election in November 2020 in which Aung San Suu Kyi’s National League for Democracy (NLD) won an outright majority in both houses of Parliament. A coup d’etat was instigated, with the Tatmadaw – the Burmese military – decrying fraud in the election. Key politicians were arrested, and rule returned to the military.

For many Burmese, this was a return to a dark past that many thought was firmly behind them. Widespread protests erupted, quickly turning violent. The Tatmadaw still has an iron grip, but it has created some bizarre situations – ordinary Burmese citizens calling on Facebook and foreign governments to impose sanctions on their country, while the Myanmar ambassador to the United Nations was fired for making an anti-army speech at the UN General Assembly.

The path forward for Myanmar from this point is unclear. The Tatmadaw has declared a state of emergency lasting up to a year, promising new elections by the end of 2021. There is little doubt that the NLD will win yet another supermajority in the election, IF they are fair and free. But that is a big if. Meanwhile, the coup threatens to return Myanmar to the pariah state that it was pre-2010. And threatens to abort all the grand economic progress made since.

In the decade since military rule was abolished, development in Myanmar has been rapid. In the capital city Yangon, glittering new malls have been developed. The Ministry of Energy in 2009 was housed in a crumbling former high school; today, it occupies a sprawling complex in the new administrative capital of Naypyidaw. While not exactly up to the level of the Department of Energy in Washington DC, it is certainly no longer than ministry that was once reputed to take up to three years to process exploration licences for offshore oil and gas blocks.

And it is that very future that is now at stake. Energy has been a great focus for investment in Myanmar, drawn by the rich offshore deposits in the Andaman Sea and the country’s location as a possible pipeline route between the Middle East and inland China. Estimates suggest that – based on pre-coup trends – Myanmar was likely to attract over US$1.1 billion in upstream investment in 2023, more than four times projected for 2021 and almost 20 times higher than 2011. The funds would not only be directed at maintaining production at the current Yadana, Yetagun, Zawtika and Shwe gas fields – where offshore production is mainly exported to Thailand, but also upcoming megaprojects such as Woodside and Total’s A-6 deepwater natural gas and PTTEP’s Aung Sinka Block M3 developments.

The coup now presents foreign investors in Myanmar’s upstream energy sector with a conundrum and reputational risk. Stay, and risk being seen as abetting an undemocratic government? Or leave, and risk being flushing away years of hard work? The home governments of foreign investors such as Total, Chevron, PTTEP, Woodside, Petronas, ONGC, Nippon Oil, Kogas, POSCO, Sumitomo, Mitsui and others have already condemned the coup. For now these companies are hoping that foreign pressure will resolve the situation in a short enough timeframe to allow business to resume. Australia’s Woodside Petroleum has already called the coup a ‘transitionary issue’ claiming that it will not affect its exploration plans, while other operators such as Total and Petronas have focused on the safety of their employees as they ‘monitor the evolving situation’.

But the longer the coup lasts without a resolution satisfactory to the international community and the longer the protests last (and the more deaths that result from that), the more untenable the position of the foreign upstream players will be. Asian investors, especially the Chinese, mainly through CNPC/PetroChina, and the Thais, through PTTEP - will be relatively insulated, but American and European majors face bigger risks. This could jeopardise key projects such as the Myanmar-to-China crude oil and natural gas pipeline project (a 771km connection to Yunnan), two LNG-to-power projects (Thaketa and Thilawa, meant to deal with the country’s chronic blackouts) and the massive Block A-6 gas development in the Shwe Yee Htun field by Woodside which just kicked off a fourth drilling campaign in December.

It is a big unknown. The Tatmadaw has proven to be impervious to foreign criticism in the past, ignoring even the most stringent sanctions thrown their way. In fact, it was a huge surprise that the army even relinquished power back in 2010. But the situation has changed. The Myanmar population is now more connected and more aware, while the army has profited off the opening of the economy. The economic consequences of returning to its darker days might be enough to trigger a resolution. But that’s not a guarantee. What is certain is that the coup will have a lasting effect on energy investment and plans in Myanmar. How long and how deep is a question that only the Tatmadaw can answer. 

Market Outlook:

  • Crude price trading range: Brent – US$63-65/b, WTI – US$60-63/b
  • The slow-but-sure recovery in Texan energy infrastructure following the big freeze has caused crude oil benchmarks to retreat somewhat, with all eyes now focusing on OPEC+ as it meets to decide its supply quotas for April and beyond
  • Some form of supply easing is expected, given that the market is showing signs of tight supply, but OPEC+ is still split on how aggressive it can be; Saudi Arabia is advocating caution while most others, led by Russia, favour a bolder easing given current prices
  • While OPEC+ supply will be keenly watched as an indicator of future crude trends, supply elsewhere is picking up, with the Baker Hughes survey of active oil and gas rigs in the USA crossing the 400-site level for the first time in over a year, with gains mainly from onshore shale drillers tempted back after being wiped up last year

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March, 03 2021
The Competition For The LNG Crown

The year 2020 was exceptional in many ways, to say the least. All of which, lockdowns and meltdowns, managed to overshadow a changing of the guard in the LNG world. After leapfrogging Indonesia as the world’s largest LNG producer in 2006, Qatar was surpassed by Australia in 2020 when the final figures for 2019 came in. That this happened was no surprise; it was always a foregone conclusion given Australia’s massive LNG projects developed over the last decade. Were it not for the severe delays in completion, Australia would have taken the crown much earlier; in fact, by capacity, Australia already sailed past Qatar in 2018.

But Australia should not rest on its laurels. The last of the LNG mega-projects in Western Australia, Shell’s giant floating Prelude and Inpex’s sprawling Ichthys onshore complex, have been completed. Additional phases will provide incremental new capacity, but no new mega-projects are on the horizon, for now. Meanwhile, after several years of carefully managing its vast capacity, Qatar is now embarking on its own LNG infrastructure investment spree that should see it reclaim its LNG exporter crown in 2030.

Key to this is the vast North Field, the single largest non-associated gas field in the world. Straddling the maritime border between tiny Qatar and its giant neighbour Iran to the north, Qatar Petroleum has taken the final investment decision to develop the North Field East Project (NFE) this month. With a total price tag of US$28.75 billion, development will kick off in 2021 and is expected to start production in late 2025. Completion of the NFE will raise Qatar’s LNG production capacity from a current 77 million tons per annum to 110 mmtpa. This is easily higher than Australia’s current installed capacity of 88 mmtpa, but the difficulty in anticipating future utilisation rates means that Qatar might not retake pole position immediately. But it certainly will by 2030, when the second phase of the project – the North Field South (NFS) – is slated to start production. This would raise Qatar’s installed capacity to 126 mmtpa, cementing its lead further still, with Qatar Petroleum also stating that it is ‘evaluating further LNG capacity expansions’ beyond that ceiling. If it does, then it should be more big leaps, since this tiny country tends to do things in giant steps, rather than small jumps.

Will there be enough buyers for LNG at the time, though? With all the conversation about sustainability and carbon neutrality, does natural gas still have a role to play? Predicting the future is always difficult, but the short answer, based on current trends, it is a simple yes. 

Supermajors such as Shell, BP and Total have set carbon neutral targets for their operations by 2050. Under the Paris Agreement, many countries are also aiming to reduce their carbon emissions significantly as well; even the USA, under the new Biden administration, has rejoined the accord. But carbon neutral does not mean zero carbon. It means that the net carbon emissions of a company or of a country is zero. Emissions from one part of the pie can be offset by other parts of the pie, with the challenge being to excise the most polluting portions to make the overall goal of balancing emissions around the target easier. That, in energy terms, means moving away from dirtier power sources such as coal and oil, towards renewables such as solar and wind, as well as offsets such as carbon capture technology or carbon trading/pricing. Natural gas and LNG sit right in the middle of that spectrum: cleaner than conventional coal and oil, but still ubiquitous enough to be commercially viable.

So even in a carbon neutral world, there is a role for LNG to play. And crucially, demand is expected to continue rising. If ‘peak oil’ is now expected to be somewhere in the 2020s, then ‘peak gas’ is much further, post-2040s. In 2010, only 23 countries had access to LNG import facilities, led by Japan. In 2019, 43 countries now import LNG and that number will continue to rise as increased supply liquidity, cheaper pricing and infrastructural improvements take place. China will overtake Japan as the world’s largest LNG importer soon, while India just installed another 5 mmtpa import terminal in Hazira. More densely populated countries are hopping on the LNG bandwagon soon, the Philippines (108 million people), Vietnam (96 million people), to ensure a growing demand base for the fuel. Qatar’s central position in the world, sitting just between Europe and Asia, is a perfect base to service this growing demand.

There is competition, of course. Russia is increasingly moving to LNG as well, alongside its dominant position in piped natural gas. And there is the USA. By 2025, the USA should have 107 mmtpa of LNG capacity from currently sanctioned projects. That will be enough to make the USA the second-largest LNG exporter in the world, overtaking Australia. With a higher potential ceiling, the USA could also overtake Qatar eventually, since its capacity is driven by private enterprise rather than the controlled, centralised approach by Qatar Petroleum. The appearance of US LNG on the market has been a gamechanger; with lower costs, American LNG is highly competitive, having gone as far as Poland and China in a few short years. But while the average US LNG breakeven cost is estimated at around US$6.50-7.50/mmBtu, Qatar’s is even lower at US$4/mmBtu. Advantage: Qatar.

But there is still room for everyone in this growing LNG market. By 2030, global LNG demand is expected to grow to 580 million tons per annum, from a current 360 mmtpa. More LNG from Qatar is not just an opportunity, it is a necessity. Traditional LNG producers such as Malaysia and Indonesia are seeing waning volumes due to field maturity, but there is plenty of new capacity planned: in the USA, in Canada, in Egypt, in Israel, in Mozambique, and, of course, in Qatar. In that sense, it really doesn’t matter which country holds the crown of the world’s largest exporter, because LNG demand is a rising tide, and a rising tide lifts all 😊

Market Outlook:

  • Crude price trading range: Brent – US$64-66/b, WTI – US$60-63/b
  • Despite the thaw after Texas saw a devastating big freeze, the slow ramp-up in restoring US Gulf Coast oil production and refining has supported crude oil prices, with Brent moving above the US$65/b level and WTI now in the low US$60/b level
  • Some Wall Street analysts, including Goldman Sachs, are predicting that oil prices could climb above US$70/b level based on current fundamentals, as the short-term spike gives ways to accelerating consumption trends
  • However, much will depend on OPEC+’s approach to managing supply in Q2, with a meeting set for early March; Saudi Arabia is once again urging caution, but there are many other members of the club champing at the bit to increase output and capitalise on the rising price environment


March, 01 2021
EIA forecasts the U.S. will import more petroleum than it exports in 2021 and 2022

Throughout much of its history, the United States has imported more petroleum (which includes crude oil, refined petroleum products, and other liquids) than it has exported. That status changed in 2020. The U.S. Energy Information Administration’s (EIA) February 2021 Short-Term Energy Outlook (STEO) estimates that 2020 marked the first year that the United States exported more petroleum than it imported on an annual basis. However, largely because of declines in domestic crude oil production and corresponding increases in crude oil imports, EIA expects the United States to return to being a net petroleum importer on an annual basis in both 2021 and 2022.

EIA expects that increasing crude oil imports will drive the growth in net petroleum imports in 2021 and 2022 and more than offset changes in refined product net trade. EIA forecasts that net imports of crude oil will increase from its 2020 average of 2.7 million barrels per day (b/d) to 3.7 million b/d in 2021 and 4.4 million b/d in 2022.

Compared with crude oil trade, net exports of refined petroleum products did not change as much during 2020. On an annual average basis, U.S. net petroleum product exports—distillate fuel oil, hydrocarbon gas liquids, and motor gasoline, among others—averaged 3.2 million b/d in 2019 and 3.4 million b/d in 2020. EIA forecasts that net petroleum product exports will average 3.5 million b/d in 2021 and 3.9 million b/d in 2022 as global demand for petroleum products continues to increase from its recent low point in the first half of 2020.

U.S. quarterly crude oil production, net trade, and refinery runs

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO), February 2021

EIA expects that the United States will import more crude oil to fill the widening gap between refinery inputs of crude oil and domestic crude oil production in 2021 and 2022. U.S. crude oil production declined by an estimated 0.9 million b/d (8%) to 11.3 million b/d in 2020 because of well curtailment and a drop in drilling activity related to low crude oil prices.

EIA expects the rising price of crude oil, which started in the fourth quarter of 2020, will contribute to more U.S. crude oil production later this year. EIA forecasts monthly domestic crude oil production will reach 11.3 million b/d by the end of 2021 and 11.9 million b/d by the end of 2022. These values are increases from the most recent monthly average of 11.1 million b/d in November 2020 (based on data in EIA’s Petroleum Supply Monthly) but still lower than the previous peak of 12.9 million b/d in November 2019.

February, 18 2021