One of the best things about commodity markets – and any sort of “real” asset – is that ultimately prices are based on supply and demand.

If the price of oil is “too high,” there’s a market response – rising production and falling demand – that pushes prices back into line over time.

Of course, oil prices can rise or fall in the short-run due to speculative flows in futures markets; in fact, that’s something we watch closely in Energy & Income Advisor over time.

However, ultimately, the price of oil doesn’t rise because people are excited about buying oil — crude rallies when demand for the commodity rises faster than supply.

It really is that simple.

Inflection points in the supply demand equation for oil are rare. In the period from 1998 through 2002, for example, rising demand for crude from emerging markets including China and India shifted the oil market from a period of glut to an era of scarcity. Ultimately that sent crude from lows in the teens in the late 90’s to highs around $150/bbl in 2008.

We believe we’ll look back on 2019 as the year we reached another major inflection point for oil. Specifically, the Saudi -led pump-at-will strategy initiated five years ago has finally had the desired effect – the recent era of persistent glut and shale oversupply is giving way to a new period of tightening supply and demand conditions.

As we approach the end of 2019, it’s time for a detailed assessment and audit of our outlook for energy prices, stocks and our portfolio recommendations.

Just under half the energy stocks in the S&P 500 have reported Q3 2019 results so far including Schlumberger and Halliburton, the world’s two diversified services majors.

What’s emerged is a clear divergence in performance – growth in international markets and continued pressure on profit margins and growth in North American shale. The international spending upturn is now well underway, which is particularly encouraging when you consider the historic drop in international oilfield spending between 2014 and 2018.

And despite the shale services bust in Q3, we’re seeing some reasons for optimism in North America including industry capacity rationalizations and a change in the way producers contract for services.

In this issue, we’ll take a deeper dive into the services business and some of the comments from both Schlumberger and Halliburton on their Q3 2019 conference calls. We’ll also examine one of the most powerful but overlooked potential upside catalysts for energy stocks in the year ahead.