The Weekly View: Beginning To Buy Energy Stocks
Comment of the Day

September 29 2015

Commentary by David Fuller

The Weekly View: Beginning To Buy Energy Stocks

My thanks to the team at RiverFront for the latest copy of their interesting letter.  Here is a brief sample:

Energy companies have only recently begun to take the necessary steps to bring energy supply back into balance with energy demand.  Despite energy prices being at similar levels 12 months ago, energy producers were optimistic that prices were likely to bounce back quickly, and thus were discouraged from making the drastic cuts that would have a significant impact on supply.  However, lower lows for oil prices in August prompted management teams to explore more drastic approaches to survive lower for longer pricing, including additional restructuring, rig count reductions, capital expenditures cuts, asset sales and mergers & acquisitions.  Put simply, we believe energy producers have felt the pain and are now motivated to truly balance the crude market. 

David Fuller's view

Here is The Weekly View.

This is an interesting comment but I suggest that the mainly Western oil companies, which I assume they are referring to, are far from the biggest problem in term of the global oversupply of crude oil. 

Most of these companies can survive by downsizing.  Moreover, the most disciplined oil companies may even be able to maintain their often very attractive dividends over the medium term. 

However, crude oil production is a global industry, mainly dominated for approximately 50 years by OPEC.  Led by the Saudis, OPEC triggered the glut of overproduction in 3Q 2014, mainly in an effort to break the fracking industry.  This has largely failed, although all producers of oil have been affected.  Nevertheless, most oil producers and not least government controlled suppliers have responded to lower oil prices by increasing output.  This may seem counterintuitive but countries overly dependent on oil production have concluded that they have little choice but to increase output, generating some revenue by selling more oil at lower prices. 

If this sounds ruinous, it is.  The Saudis have miscalculated because oil is not in short supply.  OPEC’s best option, I maintain, is to ‘declare victory’ before they have squandered all their cash reserves, and cut production. 

Meanwhile, I maintain that technology has ended the era of high oil prices.  This is a long-term triumph for mankind and will boost global GDP growth in future decades.  However, it is causing chaos right now.  Countries which are primarily exporters of oil and also other commodities, not least metals, are experiencing a severe economic slump which is unlikely to end soon.  This is a major domestic crisis for these emerging countries, often compounded by problems of governance.  It also has wider implications because these nations are less able to consume products from developed countries.  The result which we are currently seeing is a slowdown in global GDP growth.

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