Six reasons to be bullish on oil – MoneyWeek

Oilcollapsedwhenspeculatorsfledbecauseofadeterioratingsupply/demandsituation–highpricesandacredit-squeezedfallineconomicgrowthcutintodemand,atatimewhenproducersweresteppingupoutputinresponsetothosesameprices。

Fallingdemandremainsthebigproblemforoil。

TheInternationalEnergyAgencyforecastsglobalconsumptionwillfallthisyearbyamillionbarrelsaday。

Thatmaynotseemmuch,giventhatworlddemandrunsatabout85mbarrelsaday。

Butoilpricesareverysensitivetoshiftstothesupply/demandbalanceatthemargin。

Giventhecurrenttendencyforallofficialbodiestobeover-optimisticabouttheoutlookfortheworldeconomy,Isuspectoildemandwontpickupforseveralyears…andwillthendososluggishly。

Oilstocksinthetankfarmsofthedevelopednationsarewellabovefive-yearaveragelevels。

Commodities–exceptpreciousmetals–areoutoffashionwithinstitutionalinvestorsandmostspeculatorsafterlastyearsbloodbath,withtheformerdrivenbyfeartofavourlow-riskassetssuchasgovernmentbonds。

SoIdontseearesumptionofdemandfromthosequarters。

However,therearemanypositivesforoil:



SupplyiscontractingfasterthandemandasproducersbothwithintheOPECcartelandoutsideitcutproductioninresponsetotherelativelylowprices。

OutputinSaudiArabia,thebiggestsupplier,isrunningat1。

7mbarrelsadaybelowthelevelsoflastsummer。

NorthAmericanoutputisforecasttofallbyupto1。

3mbarrelsadaythisyear。



Althoughthepressuresofrisingcostshaveabated,theyarestilldoubletheleveloffiveyearsago,whencrudepriceswereaboutthesameasnow,saysRoyalDutchShellschiefexecutive,JeroenvanderVeer。

Expansionplansfornewhigh-costproductioninsectorssuchasCanadianoilsandsanddeep-waterAtlanticdepositsarebeingsloweddownorsuspended。



Ifpricesstabiliseaslowas$35,notmuchbelowcurrentlevels,onlytwointernationaloilcompanies,ExxonMobiloftheUSandTotalofFrance,wouldbeabletofinancecurrentinvestmentprogrammesoutoftheircashflow,accordingtoBernsteinResearch。

Fortheothers,raisingcapitaltofinanceinvestmentwouldbedifficultinthecurrentrisk-averseclimate。



Thelong-termcaseforscarcityinsupplyremainsunchallenged。

Governmentsinmajorconsumingcountriesarecommittedtoreducingtheirdependenceonimportedoilanddevelopingoutputofexpensivesubstitutes。

Productionfromthebigolderfieldsisdeclining。

Internationalcompaniesareexcludedfromdevelopingsuppliesfromcountrieswithbigreserves,suchasSaudiArabia,whiledepositstheycanaccessareincreasinglyexpensivetodevelopbecausetheyliedeepunderthesea,areinharshclimaticconditions,areexpensivetoprocess,andfacetheoppositionoftheenvironmentallobby。



Theeconomyoftheworldsbiggestconsumer,China,continuestogrowdespitetheglobalrecession。

Althoughitsdemandwillfailtogrowthisyear,longer-termitmustcontinuetorisestronglyastheChinesegrowricherandownmanymorecars。



IncountriessuchastheUS,whereautomobilesaretheessentialmodeoftransportationformostfamilies,althoughtherecessionwillcontinuetoactagainstdemandforpetrolanddiesel,relativelylowpriceswillhaveaneutralisingeffectonthattrend。

Alow-riskassetplay

Withthelikelihoodthatoilpricesdonthavemuchmoredownsiderisk(notbelow$35?

),andcouldwellbounceback(majorresearchhousessuggestperhapsashighas$70thisyearforthebenchmarkWestTexasIntermediatecrude),oilisstartingtolooklikealow-riskassetplay。

EvenWarrenBuffettsaysoddsaregoodthatoilwillsellinfutureforpriceswellabovecurrentlevels。

Ireckonthattheoilmajors,withtheirstrongearningsandattractivedividendyields,andinsomecasesgreatfinancialstrength–ExxonMobil(NYSE:XOM)hasacashpileof$30bn,Petrochina(SHA:601857)?

hasaccesstothepoliticalsupportandcapitaloftheChinesestate–increasinglylooklikerelativelysafehavensforinvestorsinanotherwisebleakscenario。



ThisarticlewaswrittenbyMartinSpringandpublishedinOnTarget,aprivatenewsletteronglobalstrategy。

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