My career was as a CPA serving oil and gas clients, among other things. The industry has had a shakeout these last couple of years, and many individual investors have sold their holdings, fulfilling the market dictum for all unsophisticated non-insiders:
Buy high, sell low.
Standard advice for people holding oil and gas interests is that recovery is going to be slow, and that due to a glut of supply prices will remain low for the foreseeable future. Some are saying no recovery is in sight until at least 2020.
My advice would be quite different.
- There is no connection between supplies and prices. The current “glut” is only a visible glut, as we have always had more oil and gas than we need for the foreseeable future.
- So don’t worry when you read that we have a hundred year supply of natural gas, or that new discoveries have flooded the oil market. So what? Nothing has changed.
- We recently read that OPEC met and will be curtailing supplies to the world market in the coming months. That is a signal.
- OPEC is a false front, a paper tiger, and always has been. Its sole purpose is to deflect attention from the real controllers oil the world energy markets, the international oil cartel. This concludes Exxon/Mobil, Conoco/Phillips, British Petroleum, Royal Dutch Shell, Saudi Aramco … they are all interconnected and act as one enterprise. These companies abide by the maxim of all large corporations:
Customers are our enemy, competitors are our friends.
- These companies are the real power behind “OPEC,” their sock puppet. When we read that OPEC met and made decisions, we can easily translate: The oil cartel has decided to end the current supply glut and to raise prices.
Here is how I read the regime of low prices these past couple of years: It is “SOP”, or Standard Operating Procedure, so to speak. If this were 1920 instead of 2016, we would have seen the same thing. Back then John D. Rockefeller and Standard Oil routinely crashed the oil market to drive competitors out of business. While others were busy selling low, Rockefeller was busy gobbling them up. The supposed breakup of Standard Oil was, like OPEC, just another bit of theater. All the world is a stage.
That’s all that is going on now, another shakeout. I thought for quite a while that the glut was aimed at punishing Venezuela and Russia, two large oil producing countries, and that may possibly be true regarding Russia, as it depends to a large degree on oil for foreign currency. But I have a hard time believing that Venezuela is really a rogue country. More like Cuba, Venezuela is probably another controlled state that is allowed to appear independent for sake of its own people, who tend to be hard to control.
Another objective of the glut, clearly, is that area in the northern US and Saskatchewan known as the “Bakken” formation, shown in orange on this map. There are said to be between 3-4 billion barrels of recoverable oil there, and the area has been booming, with hundreds of companies in play. But it is expensive oil to produce, and could not be sustained with oil prices in the $40 range. Consequently there has been a huge shakeout, with those hundreds of smaller companies going bust. Who do you suppose is there to clean up?
So I expect in the coming year prices will recover, we will return to $3-4.00 gasoline, and all talk of a glut will end.
The world is flooded with diamonds, enough that we could all wear big shiny rocks. But monopoly supply and pricing keeps it all under control. Oil and gas are no different. Supply and demand is for economics classes in colleges and high school, but does not apply to the real world.