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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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Your Weekly Update: 12 - 16 August 2019

Market Watch 

Headline crude prices for the week beginning 12 August 2019 – Brent: US$58/b; WTI: US$54/b

  • Saudi Arabia’s overtures to further stabilise prices was met with a largely positive response by the market, allowing crude prices to claw back some ground after being hammered by demand concerns
  • Saudi officials reportedly called other members in the OPEC and OPEC+ producer clubs to discuss options on how to stem the recent rout in prices, with an anonymous official quoted as saying that it ‘would not tolerate continued price weakness’
  • Reports suggest that Saudi Arabia plans to keep its oil exports at below 7 mmb/d in September according to sales allocations, which was seen as a stabilising factor in crude price trends
  • This came after crude prices fell as the US-China trade war entered a new front, causing weakness in the Chinese Yuan, although President Trump has floated the idea of delaying the new round of tariffs beyond the current implementation timeline of September 1
  • Crude had also fallen in response to a slide in American crude oil stockpiles and a receding level of tensions in the Persian Gulf
  • In a new report, the International Energy Agency said that the outlook for global oil demand is ‘fragile’ on signs of an economic slowdown; there is also concern that China will target US crude if the US moves ahead with its tariff plan
  • The US active rig count lost another 8 rigs – 6 oil and 2 gas – the sixth consecutive weekly loss that brought the total number of active rigs to 934
  • Demand fears will continue to haunt the market, which will not be offset so easily of Saudi-led efforts to limit production; as a result, crude prices will trade rangebound with a negative slant in the US$56-58/b range for Brent and US$52-54/b for WTI


Headlines of the week

Upstream

  • Nearly all Anadarko shareholders have approved the Occidental Petroleum deal, completing the controversial takeover bid despite investor Carl Icahn’s attempts to derail the purchase
  • Crude oil inventories in Western Canada have fallen by 2.75 million barrels m-o-m to its lowest level since November 2017, as the production limits in Alberta appear to be doing their job in limiting a supply glut while output curbs are slowly being loosened on the arrival of more rail and pipeline capacity
  • Mid-sized Colorado players PDC Energy and SRC Energy – both active in the Denver-Julesburg Basin – are reportedly in discussion to merge their operations
  • Pemex has been granted approval by the National Hydrocarbon Commission to invest US$10 billion over 25 years to develop onshore and offshore exploration opportunities in Mexico
  • Qatar Investment Authority has acquired a ‘significant stake’ in major Permian player Oryx Midstream Services from Stonepeak Infrastructure Partners for some US$550 million, as foreign investment in the basin increases
  • PDVSA and CNPC’s Venezuelan joint venture Sinovensa has announced plans to expand blending capacity – lightening up extra-heavy Orinoco crude to medium-grade Merey – from a current 110,000 b/d to 165,000 b/d
  • BHP has approved an additional US$283 million in funding for the Ruby oil and gas project in Trinidad and Tobago, with first production expected in 2021
  • CNPC, ONGC Videsh and Petronas have reportedly walked away from their onshore acreage in Sudan, blaming unpaid oil dues on production from onshore Blocks 2A and 4 that have already reached more than US$500 million

Midstream/Downstream

  • Expected completion of Nigeria’s huge planned 650 kb/d Dangote refinery has been delayed to the end of 2020, with issues importing steel and equipment cited
  • Saudi Aramco’s US refining arm Motiva announced plans to shut several key units at its 607 kb/d Port Arthur facility in Texas for a 2-month planned maintenance, affecting its 325 kb/d CDU and the naphtha processing plant
  • ADNOC has purchased a 10% stake in global terminal operator VTTI, expanding its terminalling capacity in Asia, Africa and Europe
  • A little-known Chinese contractor Wison Engineering Services has reportedly agreed to refurbish Venezuela’s main refineries in a barter deal for oil produced, in a bid for Venezuela to evade the current US sanctions on its crude exports
  • Swiss downstream player Varo Energy will increase its stake in the 229 kb/d Bayernoil complex in Germany to 55% after purchasing BP’s 10% stake
  • India has raised the projected cost estimate of its giant planned refinery in Maharashtra – a joint venture between Indian state oil firms with Saudi Aramco and ADNOC – to US$60 billion, after farmer protests forced a relocation

Natural Gas/LNG

  • The government of Australia’s New South Wales has given its backing to South Korea’s Epik and its plan to build a new LNG import terminal in Newcastle
  • Kosmos Energy is proposing to build two new LNG facilities to tap into deepwater gas resources offshore Mauritania and Senegal under development
  • In the middle of the Pacific, the French territory of New Caledonia has started work on its Centrale Pays Project, a floating LNG terminal with an accompanying 200-megawatt power plant, with Nouvelle-Caledonia Energie seeking a 15-year LNG sales contract for roughly 200,000 tons per year
August, 16 2019
The State of the Industry: Q2 2019

The momentum for crude prices abated in the second quarter of 2019, providing less cushion for the financial results of the world’s oil companies. But while still profitable, the less-than-ideal crude prices led to mixed results across the boards – exposing gaps and pressure points for individual firms masked by stronger prices in Q119.

In a preview of general performance in the industry, Total – traditionally the first of the supermajors to release its earnings – announced results that fell short of expectations. Net profits for the French firm fell to US$2.89 billion from US$3.55 billion, below analyst predictions. This was despite a 9% increase in oil and gas production – in particularly increases in LNG sales – and a softer 2.5% drop in revenue. Total also announced that it would be selling off US$5 billion in assets through 2020 to keep a lid on debt after agreeing to purchase Anadarko Petroleum’s African assets for US$8.8 billion through Occidental.

As with Total, weaker crude prices were the common factor in Q219 results in the industry, though the exact extent differed. Russia’s Gazprom posted higher revenue and higher net profits, while Norway’s Equinor reported falls in both revenue and net profits – leading it to slash investment plans for the year. American producer ConocoPhillips’ quarterly profits and revenue were flat year-on-year, while Italy’s Eni – which has seen major success in Africa – reported flat revenue but lower profits.

 After several quarters of disappointing analysts, ExxonMobil managed to beat expectations in Q219 – recording better-than-expected net profits of US$3.1 billion. In comparison, Shell – which has outperformed ExxonMobil over the past few reporting periods – disappointed the market with net profits halving to US$3 billion from US$6 billion in Q218. The weak performance was attributed (once again) to lower crude prices, as well as lower refining margins. BP, however, managed to beat expectations with net profits of US$2.8 billion, on par with its performance in Q218. But the supermajor king of the quarter was Chevron, with net profits of US$4.3 billion from gains in Permian production, as well as the termination fee from Anadarko after the latter walked away from a buyout deal in favour of Occidental.

And then, there was a surprise. In a rare move, Saudi Aramco – long reputed to be the world’s largest and most profitable energy firm – published its earnings report for 1H19, which is its first ever. The results confirmed what the industry had long accepted as fact: net profit was US$46.9 billion. If split evenly, Aramco’s net profits would be more than the five supermajors combined in Q219. Interestingly, Aramco also divulged that it had paid out US$46.4 billion in dividends, or 99% of its net profit. US$20 billion of that dividend was paid to its principle shareholder – the government of Saudi Arabia – up from US$6 billion in 1H18, which makes for interesting reading to potential investors as Aramco makes a second push for an IPO. With Saudi Aramco CFO Khalid al-Dabbagh announcing that the company was ‘ready for the IPO’ during its first ever earnings call, this reporting paves the way to the behemoth opening up its shares to the public. But all the deep reservoirs in the world did not shield Aramco from market forces. As it led the way in adhering to the OPEC+ club’s current supply restrictions, weaker crude prices saw net profit fall by 11.5% from US$53 billion a year earlier.

So, it’s been a mixed bunch of results this quarter – which perhaps showcases the differences in operational strategies of the world’s oil and gas companies. There is no danger of financials heading into the red any time soon, but without a rising tide of crude prices, Q219 simply shows that though the challenges facing the industry are the same, their approaches to the solutions still differ.

Supermajor Financials: Q2 2019

  • ExxonMobil – Revenue (US$69.1 billion, down 6% y-o-y), Net profit (US$3.1 billion, down 22.5% y-o-y)
  • Shell - Revenue (US$90.5 billion, down 6.5% y-o-y), Net profit (US$3 billion, down 50% y-o-y)
  • Chevron – Revenue (US$36.3 billion, down 10.4% y-o-y), Net profit (US$4.3 billion, up 26% y-o-y)
  • BP - Revenue (US$73.7 billion, down 4.11% y-o-y), Net profit (US$2.8 billion, flat y-o-y)
  • Total - Revenue (US$51.2 billion, down 2.5% y-o-y), Net profit (US$2.89 billion, down 18.6% y-o-y)
August, 14 2019
TODAY IN ENERGY: Australia is on track to become world’s largest LNG exporter

LNG exports from selected countries

Source: U.S. Energy Information Administration, CEDIGAZ, Global Trade Tracker

Australia is on track to surpass Qatar as the world’s largest liquefied natural gas (LNG) exporter, according to Australia’s Department of Industry, Innovation, and Science (DIIS). Australia already surpasses Qatar in LNG export capacity and exported more LNG than Qatar in November 2018 and April 2019. Within the next year, as Australia’s newly commissioned projects ramp up and operate at full capacity, EIA expects Australia to consistently export more LNG than Qatar.

Australia’s LNG export capacity increased from 2.6 billion cubic feet per day (Bcf/d) in 2011 to more than 11.4 Bcf/d in 2019. Australia’s DIIS forecasts that Australian LNG exports will grow to 10.8 Bcf/d by 2020–21 once the recently commissioned Wheatstone, Ichthys, and Prelude floating LNG (FLNG) projects ramp up to full production. Prelude FLNG, a barge located offshore in northwestern Australia, was the last of the eight new LNG export projects that came online in Australia in 2012 through 2018 as part of a major LNG capacity buildout.

Australia LNG export capacity

Source: U.S. Energy Information Administration, based on International Group of Liquefied Natural Gas Importers (GIIGNL), trade press
Note: Project’s online date reflects shipment of the first LNG cargo. North West Shelf Trains 1–2 have been in operation since 1989, Train 3 since 1992, Train 4 since 2004, and Train 5 since 2008.

Starting in 2012, five LNG export projects were developed in northwestern Australia: onshore projects Pluto, Gorgon, Wheatstone, and Ichthys, and the offshore Prelude FLNG. The total LNG export capacity in northwestern Australia is now 8.1 Bcf/d. In eastern Australia, three LNG export projects were completed in 2015 and 2016 on Curtis Island in Queensland—Queensland Curtis, Gladstone, and Australia Pacific—with a combined nameplate capacity of 3.4 Bcf/d. All three projects in eastern Australia use natural gas from coalbed methane as a feedstock to produce LNG.

Australia LNG projects

Source: U.S. Energy Information Administration

Most of Australia’s LNG is exported under long-term contracts to three countries: Japan, China, and South Korea. An increasing share of Australia’s LNG exports in recent years has been sent to China to serve its growing natural gas demand. The remaining volumes were almost entirely exported to other countries in Asia, with occasional small volumes exported to destinations outside of Asia.

Australia LNG exports by destination country

Source: U.S. Energy Information Administration, based on International Group of Liquefied Natural Gas Importers (GIIGNL)

For several years, Australia’s natural gas markets in eastern states have been experiencing natural gas shortages and increasing prices because coal-bed methane production at some LNG export facilities in Queensland has not been meeting LNG export commitments. During these shortfalls, project developers have been supplementing their own production with natural gas purchased from the domestic market. The Australian government implemented several initiatives to address domestic natural gas production shortages in eastern states.

Several private companies proposed to develop LNG import terminals in southeastern Australia. Of the five proposed LNG import projects, Port Kembla LNG (proposed import capacity of 0.3 Bcf/d) is in the most advanced stage, having secured the necessary siting permits and an offtake contract with Australian customers. If built, the Port Kembla project will use the floating storage and regasification unit (FSRU) Höegh Galleon starting in January 2021.

August, 14 2019