VBIN's oil stock thread.

[EricL]

There was a good thread on Twitter today that aligns with my thinking on oil. Here's a link to the first tweet if you want to read comments, but here is the thread.

Quote:Oil is a GDP linked commodity. Oil demand has grown every single year outside 2008/2008 (when GDP shrank). The current crisis is exceptional in that it specifically limits mobility which is oil demand. But unless you think GDP is never growing again, oil demand will grow.

Quote:What we've seen is demand has normalized in places which currently aren't being crippled by COVID. This has already happened, there is hard data. We don't have to hypothesize about a post-COVID world. Demand will normalize.

Quote:The supply side of the equation was set up constructive pre-COVID. The era of non-OPEC supply growth was coming to an end. No more mega projects, shale is going to a free cash flow model. Instead of merely staying flat, supply is now shrinking dramatically with COVID.

Quote:Oil is a commodity where 1 million barrels a day oversupply or undersupply can send prices moving dramatically in one direction or another. We're set up for a significant shortfall and nobody cares because its 6-12 months out. In 6-12 months people will care.

Quote:It's not out of the question to picture a $100 oil scenario. People generally have a recentcy bias. It's during times of change when you really get paid in this job. Understanding why the future might be different from the present.

Quote:The demand side of the equation is quite constructive. First of all, EVs do not matter in the next 5 years. Anybody that says otherwise should be fired immediately. What matters is China and India. 2.8 billion people with significantly growing middle classes.

Quote:For context, the US and Europe together have only 700 million people and account for 40% of oil demand (vs. 10% of the global population). To think people in emerging markets won't enjoy similar qualities of life is naïve.

Quote:The supply side of the equation for the last half decade has benefited from mega projects from the $100 oil period. The people that got it wrong the last downturn got it wrong because the mega projects took time. That ended last year.

Quote:And US shale benefited from capital markets, or the equation for how their market value was calculated. They benefited by maximizing growth. Now discount rates have risen, they benefit by maximizing free cash flow and returning cash to shareholders. It's pretty simple.

Quote:So growth rate comes down. And that's how they get rewarded. So the age of U.S. shale growth also ends. Now it's on OPEC to fill the gap. Peripheral OPEC has been declining, core OPEC has been underinvesting. The solution is higher prices.

I think it's going to be really difficult for US shale to return to the growth seen in the last decade. Pretty much all of the Tier 1 acreage in the Bakken and Eagleford is drilled out, and the Permian is burning through its best acreage as well. US rig count is down by over 70% since March and frac spreads are down 60%. International rig counts are similar.

E&P balance sheets are destroyed, so there won't be the funds to ramp up drilling quick enough once the shortage presents itself. With ESG investing there just aren't the funds available to E&P's like there were a decade ago. Big projects have been shelved or mothballed, and won't get started again until oil at least doubles from here.

I don't know when things will turn around, especially with COVID raging around the world, but I do believe they eventually will. And while price hasn't responded yet, US crude storage is already down 50 million barrels from the high, and is nearly back within the 5-year range.