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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.'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,, 30 May 2016

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The Impact of COVID 19 In The Downstream Oil & Gas Sector

Recent headlines on the oil industry have focused squarely on the upstream side: the amount of crude oil that is being produced and the resulting effect on oil prices, against a backdrop of the Covid-19 pandemic. But that is just one part of the supply chain. To be sold as final products, crude oil needs to be refined into its constituent fuels, each of which is facing its own crisis because of the overall demand destruction caused by the virus. And once the dust settles, the global refining industry will look very different.

Because even before the pandemic broke out, there was a surplus of refining capacity worldwide. According to the BP Statistical Review of World Energy 2019, global oil demand was some 99.85 mmb/d. However, this consumption figure includes substitute fuels – ethanol blended into US gasoline and biodiesel in Europe and parts of Asia – as well as chemical additives added on to fuels. While by no means an exact science, extrapolating oil demand to exclude this results in a global oil demand figure of some 95.44 mmb/d. In comparison, global refining capacity was just over 100 mmb/d. This overcapacity is intentional; since most refineries do not run at 100% utilisation all the time and many will shut down for scheduled maintenance periodically, global refining utilisation rates stand at about 85%.

Based on this, even accounting for differences in definitions and calculations, global oil demand and global oil refining supply is relatively evenly matched. However, demand is a fluid beast, while refineries are static. With the Covid-19 pandemic entering into its sixth month, the impact on fuels demand has been dramatic. Estimates suggest that global oil demand fell by as much as 20 mmb/d at its peak. In the early days of the crisis, refiners responded by slashing the production of jet fuel towards gasoline and diesel, as international air travel was one of the first victims of the virus. As national and sub-national lockdowns were introduced, demand destruction extended to transport fuels (gasoline, diesel, fuel oil), petrochemicals (naphtha, LPG) and  power generation (gasoil, fuel oil). Just as shutting down an oil rig can take weeks to complete, shutting down an entire oil refinery can take a similar timeframe – while still producing fuels that there is no demand for.

Refineries responded by slashing utilisation rates, and prioritising certain fuel types. In China, state oil refiners moved from running their sites at 90% to 40-50% at the peak of the Chinese outbreak; similar moves were made by key refiners in South Korea and Japan. With the lockdowns easing across most of Asia, refining runs have now increased, stimulating demand for crude oil. In Europe, where the virus hit hard and fast, refinery utilisation rates dropped as low as 10% in some cases, with some countries (Portugal, Italy) halting refining activities altogether. In the USA, now the hardest-hit country in the world, several refineries have been shuttered, with no timeline on if and when production will resume. But with lockdowns easing, and the summer driving season up ahead, refinery production is gradually increasing.

But even if the end of the Covid-19 crisis is near, it still doesn’t change the fundamental issue facing the refining industry – there is still too much capacity. The supply/demand balance shows that most regions are quite even in terms of consumption and refining capacity, with the exception of overcapacity in Europe and the former Soviet Union bloc. The regional balances do hide some interesting stories; Chinese refining capacity exceeds its consumption by over 2 mmb/d, and with the addition of 3 new mega-refineries in 2019, that gap increases even further. The only reason why the balance in Asia looks relatively even is because of oil demand ‘sinks’ such as Indonesia, Vietnam and Pakistan. Even in the US, the wealth of refining capacity on the Gulf Coast makes smaller refineries on the East and West coasts increasingly redundant.

Given this, the aftermath of the Covid-19 crisis will be the inevitable hastening of the current trend in the refining industry, the closure of small, simpler refineries in favour of large, complex and more modern refineries. On the chopping block will be many of the sub-50 kb/d refineries in Europe; because why run a loss-making refinery when the product can be imported for cheaper, even accounting for shipping costs from the Middle East or Asia? Smaller US refineries are at risk as well, along with legacy sites in the Middle East and Russia. Based on current trends, Europe alone could lose some 2 mmb/d of refining capacity by 2025. Rising oil prices and improvements in refining margins could ensure the continued survival of some vulnerable refineries, but that will only be a temporary measure. The trend is clear; out with the small, in with the big. Covid-19 will only amplify that. It may be a painful process, but in the grand scheme of things, it is also a necessary one.

Infographic: Global oil consumption and refining capacity (BP Statistical Review of World Energy 2019)

Consumption (mmb/d)*
Refining Capacity (mmb/d)
North America



Latin America









Middle East












*Extrapolated to exclude additives and substitute fuels (ethanol, biodiesel)

Market Outlook:

  • Crude price trading range: Brent – US$33-37/b, WTI – US$30-33/b
  • Crude oil prices hold their recent gains, staying rangebound with demand gradually improving as lockdown slowly ease
  • Worries that global oil supply would increase after June - when the OPEC+ supply deal eases and higher prices bring back some free-market production - kept prices in check
  • Russia has signalled that it intends to ease back immediately in line with the supply deal, but Saudi Arabia and its allies are pushing for the 9.7 mmb/d cut to be extended to end-2020, putting the two oil producers on another collision course that previously resulted in a price war
  • Morgan Stanley expects Brent prices to rise to US$40/b by 4Q 2020, but cautioned that a full recovery was only likely to materialise in 2021

End of Article

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May, 31 2020
North American crude oil prices are closely, but not perfectly, connected

selected North American crude oil prices

Source: U.S. Energy Information Administration, based on Bloomberg L.P. data
Note: All prices except West Texas Intermediate (Cushing) are spot prices.

The New York Mercantile Exchange (NYMEX) front-month futures contract for West Texas Intermediate (WTI), the most heavily used crude oil price benchmark in North America, saw its largest and swiftest decline ever on April 20, 2020, dropping as low as -$40.32 per barrel (b) during intraday trading before closing at -$37.63/b. Prices have since recovered, and even though the market event proved short-lived, the incident is useful for highlighting the interconnectedness of the wider North American crude oil market.

Changes in the NYMEX WTI price can affect other price markers across North America because of physical market linkages such as pipelines—as with the WTI Midland price—or because a specific price is based on a formula—as with the Maya crude oil price. This interconnectedness led other North American crude oil spot price markers to also fall below zero on April 20, including WTI Midland, Mars, West Texas Sour (WTS), and Bakken Clearbrook. However, the usefulness of the NYMEX WTI to crude oil market participants as a reference price is limited by several factors.

pricing locations of selected North American crudes

Source: U.S. Energy Information Administration

First, NYMEX WTI is geographically specific because it is physically redeemed (or settled) at storage facilities located in Cushing, Oklahoma, and so it is influenced by events that may not reflect the wider market. The April 20 WTI price decline was driven in part by a local deficit of uncommitted crude oil storage capacity in Cushing. Similarly, while the price of the Bakken Guernsey marker declined to -$38.63/b, the price of Louisiana Light Sweet—a chemically comparable crude oil—decreased to $13.37/b.

Second, NYMEX WTI is chemically specific, meaning to be graded as WTI by NYMEX, a crude oil must fall within the acceptable ranges of 12 different physical characteristics such as density, sulfur content, acidity, and purity. NYMEX WTI can therefore be unsuitable as a price for crude oils with characteristics outside these specific ranges.

Finally, NYMEX WTI is time specific. As a futures contract, the price of a NYMEX WTI contract is the price to deliver 1,000 barrels of crude oil within a specific month in the future (typically at least 10 days). The last day of trading for the May 2020 contract, for instance, was April 21, with physical delivery occurring between May 1 and May 31. Some market participants, however, may prefer more immediate delivery than a NYMEX WTI futures contract provides. Consequently, these market participants will instead turn to shorter-term spot price alternatives.

Taken together, these attributes help to explain the variety of prices used in the North American crude oil market. These markers price most of the crude oils commonly used by U.S. buyers and cover a wide geographic area.

Principal contributor: Jesse Barnett

May, 28 2020
Financial Review: 2019

Key findings

  • Brent crude oil daily average prices were $64.16 per barrel in 2019—11% lower than 2018 levels
  • The 102 companies analyzed in this study increased their combined liquids and natural gas production 2% from 2018 to 2019
  • Proved reserves additions in 2019 were about the same as the 2010–18 annual average
  • Finding plus lifting costs increased 13% from 2018 to 2019
  • Occidental Petroleum’s acquisition of Anadarko Petroleum contributed to the largest reserve acquisition costs incurred for the group of companies since 2016
  • Refiners’ earnings per barrel declined slightly from 2018 to 2019

See entire annual review

May, 26 2020