[doctrine]

Anyone who thinks oil prices are going to drop below $100 should take a close look at this graph. There is nothing good about it if you are a consumer.

Forward P/E on all oil stocks is ridiculous. For the XEG companies, it is more like a P/E of 4 or less. On a strip basis, it is as low as 3. Yes, that cheap.

 

[doctrine]

New high on XEG. It's almost like oil equities have been a predictably inefficient market with stock pricing that did not even remotely reflect fundamentals due to a lack of investment by institutions which kept share prices low.

Imagine what oil prices would be today if China wasn't locked down for the last 3 months, and the US hadn't been dumping its strategic reserve as fast as they can literally pump it out of the ground.

Inventories continue to drop. Prices must rise until inventories stop dropping.

 

[doctrine]

Oil prices are up 20% in 6 weeks and oil equities are basically flat. Heck, oil is up today as we speak. There is some retail investor interest, but institutional ownership is very lacking. ESG indexes have verboten the oil companies, and there is plenty of self-sanctioning. There is no substantial bid for oil company shares. Does anyone recall the cannabis mania, or even the unprofitable tech mania of the last two years? There is no mania in buying of debt free oil companies trading at 20-30% free cash flow multiples. There is only disbelief that may be relieved once multiple 10%+ SIB buybacks start to occur.

The only solution being enacted for this supply crisis increasing interest rates, which must go to extreme levels to reduce demand enough to allow inventories to grow. This, of course, is insanity and will lead to insane oil prices.

We haven't yet begun to unravel the supply problem. I still have a target of $20 for XEG this year, and $30 next year.

 

[doctrine]

Do you think the energy bull market could be fizzling out? Oil & gas has been falling hard in the last few days.

Central bank tightening is also likely killing demand. And all the speculators who went long in commodities/energy, expecting high inflation, could now get caught off-side. Maybe they will want to unwind their positions due to Fed hawkishness, driving energy down.

Remember how energy shot up really high on the inflation scare that came right before the 2008 slowdown?

Oil and gas hasn't even corrected yet and we're calling the end of the bull market? Oil is selling at $135-155 Canadian a barrel today - record prices.

Central banks are rapidly tightening in an attempt to suppress demand. If they succeed then what? Are the central banks going to sustain pressure until tens of millions of people lose their jobs, or worse? 2008 wasn't caused by oil prices, it was caused by finance, and as soon as demand came back, the oil bull market ran for another 5 years until one trillion dollars of shale equity was finally destroyed. Do you see anyone ponying up another $1 trillion for another go at shale oil?

There is no supply solution, only solutions that make the problem worse, like threatening oil companies with new taxes or investigations and bad press while we shut down nuclear plants. Worldwide insanity on energy policy.

WTI is $115 and China has been shut down for almost 3 months now and jet fuel demand is 20% below 2019 but roaring back. Think about what is happening.

 

[doctrine]

I'm just trying to stimulate debate and help us consider the other side of the trade. Let's remember that central banks are tightening, and that could take some steam out of commodity prices.

In a place like CMF, there's a danger of "groupthink" since this is a very energy-friendly crowd. Many people here probably want to believe that commodities & energy will remain strong. That kind of bias can cloud trading judgement.

So I think it's healthy to always ask: what's the other way this trade can go?

Of course it's useful to look at the other side. A serious recession will dampen demand and delay the inevitable crunch. It also allows the rapid dumping of strategic reserves to be more effective. And so down it goes, but all of the same fundamentals are still in place. The market is adjusting to the new reality of slower growth and in a market sell-off, everything goes down. As well this is seasonally the end of the strong demand period and market leaders like energy are easy targets for profit taking and for covering margin-calls. Market selling knows no rationality - sell first, ask questions later.

Once this sell-off and unwinding slows down, I would not be surprised to see energy surging back to new highs as news continues to develop that there is no magic solution to replacing energy and there is not enough of it, and we are years and years away from even changing our thinking, let alone breaking out the drill bits.

 

[doctrine]

RIP XEG bull market. I think the energy trade got overheated and too popular and it's unwinding fast. Call options are worthless, and algorithms are selling and piling on puts as they've decided oil is going to behave like 2008 when oil went from $150 to $40. Retail investors were the only real new investors in the sector and they are the most skittish of all - bye bye.

The physical market is entirely a different story - oil, gasoline, diesel, jet fuel demand is very hot. Oil wasn't even down today and stocks got murdered. Refinery margins are hitting records and capturing the entire minor fall in the price of oil and then some, $75 a barrel for refining diesel is insane. Valuations are too cheap and profits are too high for this to stay around forever.

Most oil stocks are down 30% or more in just 10 days or less. Some are down 40%. A few are down 45%. Murderous...and when oil is $105 still.

Oil stocks are falling as fast or faster than 2020 when the world was actually shutting down while Russia and Saudi Arabia were simultaneously flooding the market with oil and in an all out and very public price war. It couldn't be more opposite of the situation today.

 

[doctrine]

Too popular for sure. In other forums, I've seen many investors jumping on board the commodities bandwagon and chasing returns.

So yeah, overheated and too popular. But do you really think the XEG bull market is over?

If XEG is in bear mode now, it's actually great news for all of us as it means inflation is going to ease and all kinds of costs and headaches are going to alleviate.

I don't think it's over, even markets are doing their usual irrational reactions. I don't think we are past the 2nd inning of the energy crisis story. It will take trillions of investment over many, many years to undo the damage and that is just too much to be overcome in the long run - the world isn't going to be "surprised" by magical new production. We are just now approaching "The Wall", where all of the oil production in the world is back producing at full capacity, and oil inventories are still shrinking. We are going to be spending some time at "The Wall" - either this year, or possibly next year, and it's going to be volatile. I think it will look at lot like 2003-2007 where OPEC starts the tap-dance of "there's enough oil" and "markets are well supplied" but are quite happy with soaring prices.

I think $140 is far more likely than $70. But that's just my opinion. There is a panic dumping of stocks on the assumption that energy prices are coming down, and the fact that oil is still at $105 and in severe backwardation reflecting draining inventories with a tight physical market will eventually show the real story. But with techncial and seasonal trends, it could be a few months of short term pain.

 

[doctrine]

That's really interesting because this means that investors have, so far, missed the massive rally in energy since mid 2021. People are not "on board" and have actually been selling while energy rises. Investors have missed out on this rally.

The energy bull market is just getting started, in my opinion. We are perhaps in the 3rd inning. World demand is back to pre-COVID levels. And so is production. More or less. Yet, by some estimates, inventories are still dropping, by as much as 2 million barrels a day right now.

So what happens next year? World demand on its own could grow 1 to 2 million barrels a day, plus 1-2 million from China just catching up. Plus 1-2 million barrels a day with air travel normalizing. And the US won't be dumping its strategic reserve anymore. That is an insane gap between supply and demand. And this is assuming Europe banning 5 million barrels a day of Russian imports won't have an impact.

Today, in Europe, natural gas is selling at $600 a barrel equivalent. Power rates are in excess of $1000 a barrel. UK power bills are projected to hit 5000 pounds a year per household.

Meanwhile, as James points out, there is really no ownership in oil and gas equities. Oil companies, especially in Canada, are trading at ridiculously cheap multiples because of it. If there is an oil spike to $150, many of these companies will be trading at P/Es of under 2 and some maybe even a 1.

To each their own, but I am sure oil hits all-time highs in the next seasonal cycle (Dec 22-Jun 23). There is just no squaring the circle of the massive imbalance. It will take 5 years to solve the oil supply problem and the world hasn't even started, so energy is going to be bid up, and if you look at what Europeans are paying today, you wonder what might happen.

 

[doctrine]

We've got a world that's suffering from way too much CO2 emissions, and yet Canada keeps digging up more hydrocarbons out of the ground, selling them to the world, and directly contributing to more CO2 emissions.

The older generation is completely stuck ... absolutely trapped (mentally) ... in preserving the status quo. Want to drill more, and sell more oil & gas to everyone.

I think that only the young people can see things clearly.

Unfortunately as a nation we still put way too much effort into oil & gas projects when we should be redirecting the engineering and business talent towards more renewable energy, and also into methods and technology to reduce consumption.

BRING ON THE PAIN. People have to be forced to reduce their consumption. Humans are smart and will find new ways to manage energy needs. Perhaps the answer is to have far less energy consumption, smaller homes, leaner industries.

I was really disappointed when the Liberals approved Bay Du Nord, the off-shore mega drilling project. These are the kinds of new extractions we should STOP. And yes, we should experience the economic pain and adapt.

For god sake this isn't the 1950s. It's kind of sad to watch people try to pretend we're still living in the world of 70 years ago.

Carbon taxes and gasoline taxes have to be ramped up considerably, to the point that it really hurts. The government has to limit new production and get on a path to completely ending oil & gas production in Canada.

Countries Must Phase Out Oil and Gas Production—and Quickly

How fast do we need to phase out fossil fuels to achieve the goals of the Paris Agreement and safeguard our planet's future? A new report suggests a quicker timeline than many governments are planning.

www.iisd.org

Governments in the US and Canada are actively restricting drilling. Super majors have given up and are building renewable energy. Drill baby drill is gone. Proof is in oil production, which peaked in 2019 in North America for good. Consumption has peaked long before, in the 2000's. Small new projects are not going to replace declining production. Bay du Nord is a nothing burger.

We have implemented the Paris accord in Canada and the US and will actually do far more than the 30% requirement and drop our emissions by up to 45% in just the next 7 years. That will be a lot less energy consumption and emissions.

So we already have the policies you are asking for. What is the problem again? Is -45% emissions in the next 7 years not fast enough? I would think it would be quite an accomplishment and actually exceeds our Paris requirements by a wide margin.

 

[doctrine]

This discussion is somewhat inflammatory. But regardless of why, the world is heavily restricting production, processing, and transportation of oil and natural gas. Regardless of how much a country wants to burn it, be it China or whomever, there is now effectively a fixed or nearly fixed perhaps soon declining supply in the world. Nothing is going to change this in the next 5 years minimum.

So, I think there is an interesting intersection between those who hold oil equities and those who want to see the world transition away from oil. Oil companies know what is coming (massive disconnect between supply and never ending demand) and shareholders are happy to do what you are supposed to do to make money in such assets with a limited lifespan - sit back and pay whatever cash is generated out.