Rest In Peace

• Energy stocks have taken a beating the last few weeks
• Concerns about a worldwide resurgence of Covid-19 have raised the specter of declining economic activity and the negative potential impact on oil demand
• Longer-term two news items last month, one from the governor of California and one from China, probably pushed the sentiment surrounding the group even lower.
• There continues to be an ill conceived media narrative perpetuating this tale of woe.
• I DO believe climate change is real and a threat to our planet, but the feared demise of oil as a primary energy source now and into the foreseeable future seems a bit overdone.

Oil demand and the Covid 19 (the narrative)

Here’s the narrative (straight from the CNBC website): “Oil declines, post third consecutive negative week in four on demand concerns.”

“Oil slipped on Friday and was on track for a more than 2% weekly decline due to mounting worries about resurgent coronavirus infections crushing fuel demand and as Libyan crude exports resume.”

One of the negatives cited in this article was an uptick in the working drill rig count. It rose 6 to 261. Of course, as usual, there was no context given to this number or why it was so concerning.

Here is the context:

• Since 1940, when Baker Hughes began to keep track of rig counts, the all-time low was 253. THIS OCCURRED JULY 20, 2020, just a little over two and a half month ago.
• The peak drill rig count EVER occurred December 28, 1981. That number was 4530 active drilling units (this coincided with oil prices peaking at about $40/barrel in the late 70s).
• In recent history, thanks to more efficient drilling technology and $100/barrel oil, the count peaked at 1920 units in December 2014.

A MOVE OFF A RECORD 80-YEAR LOW OF 8 RIGS SHOULD NOT CREATE CONCERN ABOUT OVER-SUPPLYING A MARKET WHERE WEST TEXAS INTERMEDIATE CRUDE IS SELLING AT $40/BARREL.

Meanwhile, in the near term (one year or less) oil demand is likely to build in the advent of new vaccines and therapeutics to treat Covid-19. This virus is not a secular issue. We will put it behind us.

Governor Newsom and The Chinese speak

On top of the economic concerns fostered by a potential resurgence of Covid 19 (which has happened) there were two news items that I believed particularly roiled oil stocks the week of September 21, one from Gavin Newsom, the governor of California and one from Xi Jinping.

The one that seemed to cause the most damage was the signing of an executive order by Governor Newsom banning the sale of new gasoline or diesel powered vehicles in 2035 (though the sale and purchase of used vehicles of this type will continue to be permitted).

Adding insult to injury there was a story out on China citing Xi Jinping’s goal to make China carbon neutral by 2060. More lip service or do they really mean what they say? Unless someone discovers the fountain of youth I will not be here to hold them accountable.

I can absolutely see why the California governor signed his executive order given the devastation his state has suffered from the recent fires. I get it, but the devil is in the details. As one of my favorite reads, Steve Wells (a.k.a. “The Fear and Greed Trader) aptly puts it:

“Alternative energy is the wave of the future. In what can only be described as ironic, the state that has a power grid that doesn’t work tells everyone they have to drive electric cars.

Therein lies a potential opportunity. If the “leaders” promoting the green energy world are serious, it will take a lot of money and infrastructure to make those kinds of ‘announcements’ come to fruition.”

Meanwhile Chevron (CVX), the integrated oil company formerly known as Standard oil of California (CVX-$72.95–10/14/2020 closing price) traded down 7% after the governor’s announcement, finally closing that day down just under 5%. Some of the upstream E&P companies fared far worse, and they had been acting poorly in the preceding days. You think the word might have gotten out in advance that this was coming?

Conclusions

• If you believe the solutions to the globe’s environmental issues are coming much sooner than 2035, thanks for your attention. You may stop reading here because you will find the rest of my post immaterial.
• I believe that even if Governor Newsom’s ambitious plans come to fruition there may still be a significant opportunity availing itself in the energy sector between now and then.
• Demand will snap back after covid-19. IT ALREADY APPEARS TO HAVE DONE THIS IN CHINA–THE WORLD’S BIGGEST CRUDE IMPORTER..“

“China, the world’s top crude oil importer, took in 11.8 million barrels per day (bpd) of oil in September, up 5.5% from August and up 17.5% from a year earlier, but still below the record high level of 12.94 mln bpd in June, customs data showed.” (CNBC 10/14/20)

Remember, it was fear about China emploding due to the virus back in April that sent oil plummeting. For some reason nobody is exited by the fact they are reporting a pre-covid, year-over-year increase in demand.

• Over time oil demand will continue to grow because the infrastructure (clean or otherwise) does not exist now in most parts of the world, especially the developing world, to support widespread use of electric vehicles. Again, this includes California.
• This happens even as covid rebounds and even if Saudi Arabia and Russia (plus OPEC) start a measured reintroduction of the production that they have been holding off the market. It happens because we are not drilling to replace our fast depleting shale reserves. Why would you invest with WTI at $40/barrel with green energy knocking at the door?
• The psychology and sentiment now surfacing will drive investment away from oil exploration and the replacement of a depleting asset. Supplies will dwindle. This will only be reversed if oil prices snap back convincingly over a long period.

This is a cycle that has been repeated many times in the past 150 years. Remember, we went from oil glut in the early 1990s to peak oil forecasts in 2005. WTI traded as high as $140 barrel in June of 2008.

This is my take. What’s yours?