Well, here we are at Dow 20,000.
I doubt most people care all that much (except for financial news headline writers, that is). But it shows how much the tone of the markets has changed compared to a year ago.
Back then, the Dow was at 16,000, and the biggest worry among economists was still the fear of plummeting into another deflationary abyss. That was to be expected since we had oil scraping along at $27 a barrel — the lowest price since 2003.
So it’s no wonder that the Dow is 25% higher alongside a near doubling in oil prices. It’s taken fear of deflation off the table.
Personally, I’ve been really bullish on oil for close to a year now, and I think there are important long-term reasons to own oil stocks…
Limited Supply
Every week, the U.S. Commodity Futures Trading Commission comes out with something called the Commitments of Traders report. I don’t pay close attention to it, except when it starts reaching extremes (like now).
You’d have to go all the way back to 2014 to find a point when traders were as bullish about oil prices as they are now.
It doesn’t mean prices will fall tomorrow. It doesn’t even mean prices have to fall in dramatic fashion. The prices just have to fall (or just move sideways) for enough time to ruin the confidence of a majority of speculators.
The longer-term picture for oil, though, is bright indeed.
Running on Empty
In a recent report, HSBC Holdings PLC noted some of the underreported factors that it believes will keep oil prices zigzagging higher in the years to come.
Mainly, it’s all about supply constraints.
Each year, the global demand for oil rises by roughly 1 million barrels a day. But after recent years, with a collapse in oil prices and industry players still cautious, there just isn’t that much spare capacity in the global oil market.
- Spare capacity could shrink to just 1% of global supply and demand, the equivalent of roughly 96 million barrels a day — “leaving the market far more susceptible to disruptions than has been the case in recent years.”
- The giant oil fields in Saudi Arabia and elsewhere are no longer as productive as they once were. HSBC pegs an average decline rate on the order of 7% — a loss of between 3 and 4 million barrels a day. That may not seem like much, but by 2040, it means “the world could need to replace over four times the current crude oil output of Saudi Arabia” just to maintain what’s lost.
All That’s Left
And what about American shale oil?
HSBC expects to see a strong recovery. But it won’t be enough to completely offset the loss in global production in the years to come.
Yes, new oil fields will keep getting discovered. The U.S. Geological Survey recently noted a field in Texas’ Permian Basin region with an estimated 20 billion barrels of oil, most of it in shale deposits. But HSBC notes that the size of a typical new oil field has been getting smaller and smaller over past decades.
All of which means the oil patch will continue to reward investors with an eye on the big picture for this resource.
Kind regards,
JL Yastine
Editorial Director
