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
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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Anthony Rizzo Players Can't Sit On Bench According to a report from the Chicago Sun-Times, the world-famous Anthony Rizzo Phrase "Zombie Rizzo" has been told to never be used again. Of course, this is not the first time that the Zombified Chicago Cubs' first baseman has made headlines this year. A year ago, "Rosebud" was the catchphrase that he coined for himself. Also, there is Anthony Rizzo Shirts that come in his name. Now that the Cubs are World Series Champions, Anthony Rizzo is on his way to superstardom. He is leading the World Series in several categories, including hits, runs, home runs, RBI's, OBP, and SLG. Also, he's on track for a staggering year in hits, RBI's, and total bases, all while being second in home runs.
The Cubs Phenom
This season the Chicago Cubs are over 3.5 million in earnings from the local broadcasts alone. The Cubs could lose a good deal of local revenue if they fail to get back to the World Series. But the local revenue is not the biggest factor in the Cub's success. A large part of their success comes from two of their most popular players, third baseman Kris Bryant and first baseman Anthony Rizzo. These two players are now the favorites to win the MVP awards this year, especially if the Cubs are able to stay on top of the wild card standings. A Look at Rizzo Anthony Rizzo is often compared to his college teammate Andrew McCutchen. Both players have performed well at the plate.
The wood pellet mill, that goes by the name of a wood pellet machine, or wood pellet press, is popular in lots of countries around the world. With all the expansion of "biomass energy", there are now various production technologies utilized to convert biomass into useable electricity and heat. The wood pellet machines are one of the typical machines that complete this task.
Wood pellet mills turn raw materials such as sawdust, straw, or wood into highly efficient biomass fuel. Concurrently, the entire process of converting these materials in a more dense energy form facilitates storage, transport, and make use of on the remainder of any value chain. Later on, you will find plans for biomass fuel to replace traditional fuels. Moreover, wood pellet machines supply the chances to start many different types of businesses.
What Is A Wood Pellet Mill?
Wood pellet machines are kinds of pellet machines to process raw materials including peanut shells, sawdust, leaves, straw, wood, plus more. Today the pellet mills can be purchased in different types. Both the main types include the ring die pellet mills as well as the flat die pellet mills. Wood pellet mills are designed for processing many different types of raw materials irrespective of size. The pellet size is very simple to customize with the use of a hammer mill.
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How To Maintain A Wood Pellet Mill
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It was shaping up to yet another dull OPEC+ meeting. Cut and dry. Copy and paste. Rubber-stamping yet another monthly increase in production quotas by 432,000 b/d. Month after month of resisting pressure from the largest economies in the world to accelerate supply easing had inured markets to expectations of swift action by OPEC and its wider brethren in OPEC+.
And then, just two days before the meeting, chatter began that suggested something big was brewing. Whispers that Russia could be suspended made the rounds, an about-face for a group that has steadfastly avoided reference to the war in Ukraine, calling it a matter of politics not markets. If Russia was indeed removed from the production quotas, that would allow other OPEC+ producers to fill in the gap in volumes constrained internationally due to sanctions.
That didn’t happen. In fact, OPEC+ Joint Technical Committee commented that suspension of Russia’s quota was not discussed at all and not on the table. Instead, the JTC reduced its global oil demand forecast for 2022 by 200,000 b/d, expecting global oil demand to grow by 3.4 mmb/d this year instead with the downside being volatility linked to ‘geopolitical situations and Covid developments.’ Ordinarily, that would be a sign for OPEC+ to hold to its usual supply easing schedule. After all, the group has been claiming that oil markets have ‘been in balance’ for much of the first five months of 2022. Instead, the group surprised traders by announcing an increase in its monthly oil supply hike for July and August, adding 648,000 b/d each month for a 50% rise from the previous baseline.
The increase will be divided proportionally across OPEC+, as has been since the landmark supply deal in spring 2020. Crucially this includes Russia, where the new quota will be a paper one, since Western sanctions means that any additional Russian crude is unlikely to make it to the market. And that too goes for other members that haven’t even met their previous lower quotas, including Iraq, Angola and Nigeria. The oil ministers know this and the market knows this. Which is why the surprise announcement didn’t budge crude prices by very much at all.
In fact, there are only two countries within OPEC+ that have enough spare capacity to be ramped up quickly. The United Arab Emirates, which was responsible for recent turmoil within the group by arguing for higher quotas should be happy. But it will be a measure of backtracking for the only other country in that position, Saudi Arabia. After publicly stating that it had ‘done all it can for the oil market’ and blaming a lack of refining capacity for high fuel prices, the Kingdom’s change of heart seems to be linked to some external pressure. But it could seemingly resist no more. But that spotlight on the UAE and Saudi Arabia will allow both to wrench some market share, as both countries have been long preparing to increase their production. Abu Dhabi recently made three sizable onshore oil discoveries at Bu Hasa, Onshore Block 3 and the Al Dhafra Petroleum Concession, that adds some 650 million barrels to its reserves, which would help lift the ceiling for oil production from 4 to 5 mmb/d by 2030. Meanwhile, Saudi Aramco is expected to contract over 30 offshore rigs in 2022 alone, targeting the Marjan and Zuluf fields to increase production from 12 to 13 mmb/d by 2027.
The UAE wants to ramp up, certainly. But does Saudi Arabia too? As the dominant power of OPEC, what Saudi Arabia wants it usually gets. The signals all along were that the Kingdom wanted to remain prudent. It is not that it cannot, there is about a million barrels per day of extra production capacity that Saudi Arabia can open up immediately but that it does not want to. Bringing those extra volume on means that spare capacity drops down to critical levels, eliminating options if extra crises emerge. One is already starting up again in Libya, where internal political discord for years has led to an on-off, stop-start rhythm in Libyan crude. If Saudi Arabia uses up all its spare capacity, oil prices could jump even higher if new emergencies emerge with no avenue to tackle them. That the Saudis have given in (slightly) must mean that political pressure is heating up. That the announcement was made at the OPEC+ meeting and not a summit between US and Saudi leaders must mean that a façade of independence must be maintained around the crucial decisions to raise supply quotas.
But that increase is not going to be enough, especially with Russia’s absence. Markets largely shrugged off the announcement, keeping Brent crude at US$120/b levels. Consumption is booming, as the world rushes to enjoy its first summer with a high degree of freedom since Covid-19 hit. Which is why global leaders are looking at other ways to tackle high energy prices and mitigate soaring inflation. In Germany, low-priced monthly public transport are intended to wean drivers off cars. In the UK, a windfall tax on energy companies should yield US$6 billion to be used for insulating consumers. And in the US, Joe Biden has been busy.
With the Permian Basin focusing on fiscal prudence instead of wanton drilling, US shale output has not responded to lucrative oil prices that way it used to. American rig counts are only inching up, with some shale basins even losing rigs. So the White House is trying more creative ways. Though the suggestion of an ‘oil consumer cartel’ as an analogue to OPEC by Italian Prime Minister Mario Draghi is likely dead on arrival, the US is looking to unlock supply and tame fuel prices through other ways. Regular releases from the US Strategic Petroleum Reserve has so far done little to bring prices down, but easing sanctions on Venezuelan crude that could be exported to the US and Europe, as well as working with the refining industry to restart recently idled refineries could. Inflation levels above 8% and gasoline prices at all-time highs could lead to a bloody outcome in this year’s midterm elections, and Joe Biden knows that.
But oil (and natural gas) supply/demand dynamics cannot truly start returning to normal as long as the war in Ukraine rages on. And the far-ranging sanctions impacting Russian energy exports will take even longer to be lifted depending on how the war goes. Yes, some Russian crude is making it to the market. China, for example, has been quietly refilling its petroleum reserves with Russian crude (at a discount, of course). India continues to buy from Moscow, as are smaller nations like Sri Lanka where an economic crisis limits options. Selling the crude is one thing, transporting it is another. With most international insurers blacklisting Russian shippers, Russian oil producers can still turn to local insurance and tankers from the once-derided state tanker firm Sovcomflot PJSC to deliver crude to the few customers they still have.
A 50% hike in OPEC’s monthly supply easing targets might seem like a lot. But it isn’t enough. Especially since actual production will fall short of that quota. The entire OPEC system, and the illusion of control it provides has broken down. Russian oil is still trickling out to global buyers but even if it returned in full, there is still not enough refining capacity to absorb those volumes. Doctors speak of long Covid symptoms in patients, and the world energy complex is experiencing long Covid, now with a touch with geopolitical germs as well. It’ll take a long time to recover, so brace yourselves.
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