Best of the Week
Most Popular
1.What Happened to the Stock Market Crash Experts Were Predicting - Sol_Palha
2.London Housing Market Property Bubble Vulnerable To Crash - GoldCore
3.The Plan to Control ALL Your Money is Now at Advanced Stage
4.Why Gold Is Set For An Epic Rally This Spring - James Burgess
5.MR ROBOT NHS Cyber Attack Hack - Why Israel, NSA, CIA and GCHQ are Culpable - Nadeem_Walayat
6.Emmanuel Macron and Banking Elite Win French Presidential Election 2017 - Nadeem_Walayat
7.Trend Lines Met, Technical's are Set - US Dollar is Ready to Rally (Elliott Wave Analysis) - Enda_Glynn
8.The Student Debt Servitude Sham - Gordon_T_Long
9.Czar Trump Fires Comey, Terminates Deep State FBI, CIA Director Next? - Nadeem_Walayat
10.UK Local Elections 2017 - Labour Blood Bath, UKIP Death, Tory June 8th Landslide - Nadeem_Walayat
Last 7 days
Opinion Polls Based UK General Election Seats Per Party Forecast 2017 - 29th May 17
Gold Proprietary Cycle Indicator is Down - 29th May - 29th May 17
How Investors Can Profit From The Coming Resource Wars - 29th May 17
Gold vs. Gold Mining Shares – Just The Facts, Ma’am - 29th May 17
Walkers Crisps Pay Packet £5 Cash Wins After Buying 64 Multi-packs - 29th May 17
SPX/NDX/NAZ Hit New All-time Highs - 27th May 17
GBPUSD Top in Place, GOLD Price Ready to Rocket? - 27th May 17
Silver Mining Stocks Fundamentals - 27th May 17
BBC Newsnight Falls for FAKE POLLS, Opinion Pollsters Illusion for Mainstream Media to Sell - 27th May 17
UK Local Election Results Forecast for General Election 2017 - 26th May 17
Stock Market & Crude Oil Forecast! - 26th May 17
Opinion Pollsters UK General Election Seats Forecasts 2017 - 26th May 17
Bitcoin and AltCoins Crypto Price Correction - 26th May 17
Bearish Head and Shoulders in EURUSD? - 26th May 17
SELL US Stocks - Massive Market CRASH WARNING! - 26th May 17
EURGBP: A Picture of Elliott Wave Precision - 26th May 17
Credit Downgrades May Prompt Stock Market Capital Shift - 26th May 17
Rosenstein and Mueller: the Regime Change Tag-Team - 25th May 17
Stock Market Top - Are We There Yet? - 25th May 17
Should I Invest My Fortune in Gold? Inaugural Lecture by Dr Brian Lucey - 25th May 17
USD/CAD Continues Decline - 25th May 17
Bitcoin Price Goes Loco! Surges through $2,500 Despite Unclear Fork Issues - 25th May 17
The US-Saudi Arms Deal - Sordid Saudi Signals - 25th May 17
The No.1 Commodity Play In The World Today - 24th May 17
Marks and Spencer Profits Collapse, Latest Retailer Hit by Brexit Inflation Tsunami 2017 - 24th May 17
Why Online Trading Platforms Are Useful for Everyone - 24th May 17
The Stock Market Will Tank Hard - 24th May 17
It’s Better to Buy Gold & Silver When It DOESN’T Feel Good - 24th May 17
Global Warming - Saving Us From Us - 24th May 17
Stock Market Forecast for Next 3 Months - Video - 23rd May 17
Shale Oil & Gas Production Costs Spiral Higher As Monstrous Decline Rates Eat Into Cash Flows - 23rd May 17
The Only Metal Trump Wants More Than Gold - 23rd May 17
America's Southern Heritage is a Threat to the Deep State - 23rd May 17
Manchester Bombing - ISIS Islamic Terrorist Attack Attempt to Influence BrExit Election - 23rd May 17
What an America First Trade Policy Could Mean for the US Dollar - 22nd May 17
Gold and Sillver Markets - Silver Price Sharp Selloff - 22nd May - 22nd May 17
Stock Market Volatile C-Wave - 22nd May 17
Stock Market Trend Forecast and Fear Trading - 22nd May 17

Market Oracle FREE Newsletter

Why 95% of Traders Fail

Here’s Why We Won’t See An Energy Rally—and How to Profit

Commodities / Energy Resources Feb 09, 2017 - 04:44 PM GMT

By: John_Mauldin

Commodities

BY PATRICK WATSON : Energy stocks jumped after the November election because investors thought new management in Washington would be their ticket to wealth. But what if it’s not?

On the surface, the stars seem lined up for Big Oil & Gas. President Trump promised to reduce the industry’s regulatory burden and open more federal land and offshore areas to drilling.


Furthermore, lower taxes and friendlier regulation will unleash animal spirits, boosting economic growth—and energy demand with it.

Maybe it will work that way, but simple economics tells me it won't be so easy.

The Bullish Case for Energy

So here’s what we know: Energy production is a highly regulated industry, and Trump will make it less so. The president demonstrated this last week when he revived the Keystone and Dakota Access pipeline projects, which had been stalled by his predecessor.

Also, Trump’s key appointees should be a boon for the industry:

  • Scott Pruitt, nominated to lead the Environmental Protection Agency, was the energy industry’s best friend as Oklahoma attorney general.
  • Former Texas Governor Rick Perry, Trump’s choice for secretary of energy, once advocated abolishing the very department he will soon lead.
  • Trump’s nominee for secretary of state, Rex Tillerson, was the CEO of ExxonMobil (XOM) and negotiated many overseas energy deals. US companies will no doubt gain opportunities under his watch, maybe even in Russia.

Reducing compliance headaches will make life much easier for oil and gas companies. All other things being equal, it should translate into higher profits.

There’s just one problem: All other things aren’t equal.

Supply & Demand & Oil

As the available supply of a good or service increases, its price will normally fall unless demand also increases. When supplies fall, the opposite happens: prices rise unless demand falls, too.

However, the seller’s cost to acquire the goods isn’t part of this equation. It is an indirect factor. Lower costs let sellers supply more, thereby pushing the unit price lower.

This is the oil industry’s present problem. The very same factors that reduce their costs will also lead to higher supply. In the absence of higher demand, lower prices will follow.

Energy intensity is shrinking

So what about that demand growth? Will we use more energy in the coming years?

Yes, says the new BP Energy Outlook, an exhaustive report from the former British Petroleum. BP thinks world energy consumption will grow 1.3% per year from 2015 to 2035.

That’s impressive until you consider that it grew 2.2% a year from 1995 to 2015.

Why? The amount of energy it takes to generate economic growth, or “energy intensity,” is shrinking fast. Today’s vehicles and technology are far more fuel-efficient than those of the past. BP believes world GDP can double in the next 20 years with energy usage growing only 30%.

Worse, the demand growth isn’t happening here. It will be flat or even decline in the OECD countries (the US and other developed markets). Most growth will happen in China, India, the rest of Asia, and Africa. You can see it in the chart below from BP.

Source: BP

The energy mix is changing too. Renewable sources like solar are growing fast in much of the world. Depending on location, in many places solar is now economically on par with fossil fuels, even without government subsidies. And these technologies will only improve.

So if demand for oil, gas, and coal is flat or rising slowly, producing more of these energy sources will keep prices steady at best, and more likely push them lower.

There’s a supply glut

You may have heard that oil reserves have grown steadily since 1980. But in reality, the oil supply is not growing at all. Whatever is down there is what we have. So when you hear that supply is rising, it means we’re finding more… thanks to improved technology.

The chart below ought to terrify energy bulls.

Source: BP

Even if the entire world stopped exploring for oil right now, the amount we’ve already located is more than twice the cumulative projected demand from 2015 to 2050.

So if you own some of those untapped reserves, this tells you to bring your oil to the surface as fast as you possibly can. Then sell it to someone while they still have a use for it. Otherwise, you’ll be stuck with a stranded asset nobody wants.

That’s what is happening too, despite the oil price falling sharply since 2014.

Debt-financed energy producers keep producing even when the oil price is below their production cost, just to cover their debt service. They literally can’t afford to stop—and that’s capping the oil price in the $50–$60 range.

Meanwhile, new technologies are pushing production costs even lower by automating the dangerous work formerly done by well-paid humans.

  • National Oilwell Varco (NOV), for instance, makes an “Iron Roughneck” that does the tedious, repetitive work of connecting drill pipe segments.
  • In offshore fields, submersible drones are doing much of the repair and maintenance work once done by human divers.
  • Nabors Industries (NBR) says its new automated drill rigs will cut down the number of workers needed at each site from 20 to just five.

Lower production costs mean the supply curve can shift even more, letting producers supply the same quantity at a lower price. If that happens in a declining-demand environment, the price can drop even lower—and almost certainly will.

Similar trends are underway in coal and natural gas. All these energy sources face abundant supply, falling production costs, and lower demand.

In my book, that doesn’t add up to a sustainable bull market.

You can still profit from the energy sector… for now

I am not predicting doom for the energy sector by any means. There is still plenty of opportunity to earn good revenue and even boost it.

But in the aggregate, the extractive energy sector faces serious headwinds, and there’s nothing President Trump and/or Congress can do to change it.

If you’re a nimble trader, you might be able to extract some profits in the next year or two. I’ve recommended natural-gas pipeline plays in both of my publications, the income-focused Yield Shark and its big brother, Macro Growth & Income Alert, a premium alert service for advanced income investing.

Opportunities exist—for now. But in 5–10 years, it'll be a different story.

If Donald Trump gets a second term as president, the energy industry will be dramatically smaller than it was when he started.

Stay a Step Ahead of Economic Disrupters with Connecting the Dots

Don’t let energy stocks drain your portfolio. Keep on the forward edge of Big Oil, Trump’s energy agenda, and more every week in Connecting the Dots. In this free newsletter, Patrick Watson identifies budding macro trends long before mainstream investors catch on, and explains how they’ll affect your life and your portfolio. Click here to subscribe for free.

John Mauldin Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife