The American economy is about to undergo its last oil shock. But it won’t be the kind of shock you have come to expect, and it will have a different impact on oil stock than you might think.
As I wrote Mar. 20, global trends are lining up to support higher prices in the near term, which likely will be a boon to oil stocks.
Venezuela is out of the market, and Saudi Arabia is doing everything it can to push up prices by reducing supplies. Oilprice.com believes the Kingdom’s target is $80-85 per barrel oil, which is needed for it to balance its budget.
The problem is that price leads to what is politely termed “demand destruction.” Renewable energy, especially efficiency, thrives on high oil prices. Since the start of 2019 shares in solar panel maker First Solar (NASDAQ:FSLR) are up 21%, and those of SunPower (NASDAQ:SPWR) 23%.
What the Trump Administration wants is price stability which is likely why we saw the president tweeting OPEC to “take it easy” after prices reached their present level in February.
Losing that stability is what the next oil shock will be all about.
Oil Stocks and the U.S. Economy
The U.S. is both the largest consumer and largest producer of oil today. Shares in the largest Permian producers (and heavy-hitting oil stocks), Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), are both up on the year. But their gains of 19% and 14% are just slightly higher than those of the S&P 500, up 12.6%, and well behind those of the solar powers.
The rise in U.S. production has made higher prices a net positive for the economy. The Administration wants to maintain this by cutting aid for renewable energy. But state policies, and business preferences, mean that demand is leveling off, except for natural gas liquids used to lift heavy oil and allow crushed Alberta bitumen to be moved by pipeline.
Gasoline is a key market for oilmen, but U.S. production of electric cars is skyrocketing. Electricity is a key market for natural gas, but demand there is declining as insulation, LEDs, and automation reduce demand from business.
Lower U.S. demand for oil and gas has kept the price of West Texas Intermediate (WTI), the standard U.S. grade, $7.50 per barrel below the price for Brent North Sea oil, the world standard. The spread has remained even though the U.S. has allowed direct oil exports since 2016.
The Market and Oil Stocks
Morgan Stanley (NYSE:MS) analysts are expecting prices of Brent oil to reach $75 per barrel by summer, about $8 per barrel higher than they are now. But analyst Arthur Berman believes this rally in oil stocks won’t last past the summer, just as natural gas prices peaked in the winter and are now heading down.
While both the U.S. and the Saudis are trying to get the best price possible, the U.S. is playing a long-term game while the Saudis are focused on the short term. Both bets are losing ones.
Recent Saudi production cuts could soon be matched by increases in Mexico, Libya, and Nigeria, all of which of which are under pressure to earn as much as they can. Guyana should start producing oil for Exxon Mobil in 2020. It could quickly become a larger producer than either Mexico or Venezuela.
The Bottom Line on Oil Stocks
In the 1970s oil prices rose sharply as Middle East producers gained the power to control supply, and the U.S. military backed their pricing.
In the 2010s technology has increased U.S. production and cut demand, while producers outside the U.S. now face domestic pressure to pump more.
The market’s balance is slowly being reined-in by renewable energy, and by efficiency. The next “energy crisis” will be built on a market panic, and collapsing prices, rather than the other way around.
That day of reckoning is approaching. Investors should prepare their portfolios for it.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
