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Oil: It’s Not 2014

By Roger S. Conrad on Dec. 19, 2018

Crude oil prices accelerated their recent downtrend this week. West Texas Intermediate Crude at Cushing Oklahoma, the North American benchmark, has now dropped from high 70s to mid 40s in less than three months.

Prices in more transportation-constrained basins have fared worse. Edmonton Mixed Sweet, for example, is now trading for less than $40 a barrel. WTI Midland is as well, $7 a barrel less than WTI Cushing as swelling Permian Basin output has swamped available pipeline capacity.

Given the pounding we’d already seen in many energy stocks before this selloff, investors can be forgiven for thinking the sector is headed for another 2014-16 crash. This issue is devoted to those concerns.

Our feature article focuses on both the supply side and the demand side, with comparisons to two periods of steeply falling oil prices:

• The Financial Crisis of 2008, a period when global demand fell off a cliff.

• The 2014-16 oil crash, when Saudi Arabia and other traditional producers tried to flush out US shale producers by dramatically increasing output to flood supply and drive down prices.

We continue to believe oil prices will stay in the “lower for longer” range we’ve forecast since oil last traded over $100 a barrel back in mid-2014. That’s in large part the result of the emergence of North American shale production. Shale output ramps up dramatically when oil starts to get closer to $100 a barrel, boosting global supply and essentially capping the upper limit of prices. It ramps down when oil starts to drop meaningfully below $50, tightening supply again and eventually pushing up prices.

Our view is oil’s ongoing selloff, like the 2014-16 decline, was triggered by miscalculation on the part of traditional oil producers. Saudi Arabia especially went too far to ramp up output into expectations that Iranian exports would fall faster than they have. As we point out below, however, that’s about as far as the similarities to 2014 go.

End-year is a good opportunity to clean the slate and we have ideas in this issue to do that from legacy portfolios. We continue to advise readers focus all investment on the Actively Managed Portfolio.

On the other hand, despite the volatility through the energy sector, we continue to see compelling value and a strong recovery ahead, possibly as soon as early 2019. So while this is good time for redeploy funds, it’s also a prime opportunity to buy stocks of strong energy companies for what we believe will be a solid run higher.

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      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor