There is one hard and fast rule in the oil business: Before you can pump it, you have to find it.
The growing problem here is that oil discoveries were horrible in
2016, really bad in 2015, and terrible in 2014. That recent three year
stretch is the worst in the data series:
Again: you have to find it before you can pump it. And around the
world, oil companies are just not finding as much as they used to.
Remember that blue dotted line on the oil investment chart
above?Here’s its counterpart, showing discoveries over the same time
frame -- it’s just a straight slump downwards:
Now it's clear why the oil companies pulled back their investment dollars so rapidly when prices slumped: They were spending more and finding less throughout
the 2009-2014 period, so they were already feeling the pain of
diminishing returns. When the price of oil cracked below $100 a barrel,
they wasted no time reining in their investment dollars.
Should we be concerned about this record lowest level of oil project funding in 70 years?Why, yes, we should.Everyone should:
"Our analysis shows we are entering a period of greater oil
price volatility (partly) as a result of three years in a row of global
oil investments in decline: in 2015, 2016 and most likely 2017," IEA
director general Fatih Birol said, speaking at an energy conference in Tokyo. "This is the first time in the history of oil that
investments are declining three years in a row," he said, adding that
this would cause "difficulties" in global oil markets in a few years.
(Source)
To give you a visual of the process, here’s a chart to help you
understand why it takes years between making an initial find and maximum
production:
This bears repeating: Oil is the most important substance for our
economy, we’re burning more of it on a yearly basis than ever before,
and we just found the lowest amount since the world economy was several times smallerthan it is now. And all this is happening while we're reducing our efforts to find more at an unprecedented rate.
If you really want to understand why I hold these views, you need to
fully understand and digest this next chart. It shows the amazingly
tightly-coupled linear relationship between economic growth and energy
consumption:
This chart above says, if you want an extra incremental unit of
economic growth you're going to need to have an extra incremental unit
of energy.More growth means more energy consumed.
And today, oil is still THE most important source of energy. It's the
dominant energy source for transportation, by far.A global economy,
after all, is nothing more than things being made and then moved, often
very far distances. Despite what you might read about developments in
alternative and other forms of energy, our dependency on oil is still
massive.
Plunging Investment
Resulting from the start of oil's price decline in 2014, the world
saw a historic plunge in oil investments (exploration, development,
CAPEX, etc) as companies the world over retracted, delayed or outright
canceled oil projects:
In the chart above, note the two successive drops in oil investment
from 2014-2015 and then again into 2016. So far 2017 is shaping up for
another successive decline, which will mark the only three-year decline
in investment in oil's entire history.So what's happening here is
actually quite unusual.
This isn’t just a slump. It’s an historic slump.
We don’t yet know by how much oil investment will decline in 2017,
but it’s probably pretty close to the rates seen in the prior two years.
Next, take note of the dotted blue arrow in the chart.See how far oil
investment climbed during the years from 2009-2014?Not quite a
doubling, but not far off from one either.Remember those years, I’ll
return to them in a moment.
The key question to ask about the 2009-2014 period is: How much new oil was discovered for all that spending?
Turns out: Not a lot.
There’s no way to speed up the process of oil discovery and
extraction meaningfully, no matter how much money and manpower you throw
at it.It simply requires many years to go from a positive test bore to a
fully functioning extraction and distribution/transportation program
operating at maximum.
In Part 2: Preparing For The Coming Shock we provide the evidence that shows why by 2019, or 2020, oil prices will have forced a new crisis upon the world.
More economic growth requires more energy. Always has and it always
will. Oil is the most important form of energy of them all. But everyone
assumes -- especially today when it appears as if we're "awash" in it
given the current supply glut -- that we will always have access to as
much as we need.
That's not going to be the case soon. And you are one of the few to understand why.
You get to use that awareness to make conscious decisions about your
own life right here and right now. You can position yourself for safety,
as well as to take advantage of what are likely to be
once-in-a-lifetime investment opportunities.
But you also need to prepare for those in your life, like most other
people today, who lack the ability, insight, or capability to join you
at this early stage.
OPEC and other major oil producers have taken on an ambitious battle
to rebalance the oversupplied oil market, but despite the best
intentions their efforts aren’t enough, Morgan Stanley warns.
In
a Thursday research report, the Wall Street bank called on U.S.
shale-oil producers to join in efforts to tackle the global supply glut
that has pummeled prices since the summer of 2014.
“If OPEC
doesn’t balance the market, the oil price will have to force it
somewhere else, most likely in U.S. shale. For a chance of a balanced
market in 2018, the U.S. rig count can no longer grow and possibly needs
to contract ~150 rigs. Given current break-evens, this requires WTI
between $46-50,” the Morgan Stanley analysts said in the report.
Cementing
their downbeat assessment of the oil market, they significantly
downgraded their 2017 forecasts for both West Texas Intermediate and
Brent. They now see WTI trading at $48 a barrel at the end of the year,
down from $55 expected previously. For Brent, they cut their forecast to
$50.5 from $57.5.
Morgan Stanley
Crude oil for August delivery most recently traded at
CLQ7, -2.37%
$44.81 a barrel on Thursday, while Brent for September
LCOU7, -2.31%
was at $47.45 a barrel.
Oil
prices have been volatile in recent months, even as the Organization of
the Petroleum Exporting Countries and other major producers—including
Russia—have eased output. They initially agreed to a six-month pact
running from January until the end of June, but as prices remained
stubbornly low, they extended the accord into the first quarter of 2018.
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The
OPEC and non-OPEC members have signed up to cut output by a collective
1.8 million barrels a day, hoping it will bring global oil inventories
to a five-year average. The Saudi Arabian and Russian oil ministers have
even pledged to do “whatever it takes” to balance the market.
However, there may be a limit to “whatever it takes,” according to the Morgan Stanley analysts.
“Although
compliance has been healthy, OPEC’s production cuts have so far made
little dent in inventory levels, which are still roughly as high as a
year ago,” they said.
“To support prices in the mid-$50s,
OPEC-12 would probably need to lower production by another
200,000-300,000 barrels a day and extend the output agreement to
end-2018. We find this unlikely,” they added.
Morgan Stanley
Out of the 14 OPEC members,
only 12 are included in the output restrictions. Libya and Nigeria are
exempt because production in those countries has been hit by internal
conflicts. Supply from both nations, however, has risen recently, seen
as partly scuttling OPEC’s efforts to bring down inventories.
Additionally,
U.S. shale producers responded to the higher prices that came after the
OPEC deal by ramping up production rapidly, helping to offset the
global production cuts.
There have been green shoots in the
market, however. According to the International Energy Agency’s monthly
report, demand outstripped supply in the second quarter, and that
shortfall should be “significant” in the second half of 2017.
But unless someone does something, that trend could quickly turn again, Morgan Stanley warned.
“The
combination of little impact on physical balances, but a strong signal
to invest has meant that the OPEC cuts have had a perverse effect: on
current trends, the oil market would be oversupplied again in 2018,” the
analysts said.
That is why U.S. producers need to stop some
pumps too, they said. Ideally the number of rigs need to fall by
120-180, according to Morgan Stanley, to constrain output to a level
that doesn’t flood the oil market.
The weekly Baker Hughes rig count last Friday showed a decline in active oil rigs for the first time in 24 weeks. The number of rigs fell by two to 756.
“If
the U.S. rig count were to stabilise, it would impact production
relatively quickly. However, perhaps still not as fast as is generally
perceived. Even U.S. shale does not respond instantly,” the analysts
said.
Not everyone is as downbeat on the oil market, though. UBS
commodity analyst Giovanni Staunovo said earlier this week that both
Brent and WTI could rally more than 20%
before the end of 2017. That is partly because he believes demand will
continue to outstrip supply, and partly because he sees a chance U.S.
production will disappoint.
“If the market outside the U.S. is
already in a deficit, the U.S. is not immune to that. It’s a global
market, so it will also affect the U.S,” he said.
“You’ve had
reports indicating [the U.S.] can even produce at $20 a barrel. But
let’s see if last week’s rig count is a start of a trend or not—if it’s
the start of a trend it shows that they also have some issues producing
at these price levels.”
Widening gap between quants, fundamental long-short managers
Systematic strategies now fastest growing investment category
That money you see sloshing around in the U.S. stock market? It belongs to the robots.
At
least, that’s the picture emerging from a growing divergence between
quantitative funds and discretionary managers. Systematic strategies
have barely budged from near-record participation in U.S. stocks.
Meanwhile, fundamental equity long-short managers can’t afford to be
anything but picky, considering the market’s narrow leadership.
The
result: the largest gap on record between humans’ and computers’ gross
exposure to U.S. equities, data compiled by Credit Suisse Group AG show.
For now, systematic traders are the dominating force in markets.
“This is the largest footprint for quants. It’s a function of
allocation and leverage,” Mark Connors, global head of risk advisory at
Credit Suisse Group, said. “The reason why that’s important is that
they’re not going away. Complexity isn’t going to be rolled back.”
In
a sense, the divergence reflects the growing popularity of quant
methods over traditional strategies. Nailing down the exact size of the
quantitative space is nearly impossible, though some estimates are as
high as $500 billion. What’s more certain is that it’s getting bigger.
Quant is the fastest growing category on both Credit Suisse’s prime
brokerage platform and the broader universe.
Passive and
quantitative investors now account for about 60 percent of all equity
assets, compared with 30 percent a decade ago, according to data from JP
Morgan Chase & Co. The firm estimates that only 10 percent of
trading volume now comes from discretionary investors.
But determining whether this computer-driven force dictates
market moves is another matter. Quants on the Credit Suisse platform are
roughly defined as funds that invest in thousands of equities and trade
dynamics, rather than making stock-specific bets. Since they use
different signals and time horizons, their combined impact is likely
muted.
Finger Pointing
“Diversity of market participant
trading is a very important element of a healthy market. Quant funds
certainly add to that diversity, and I feel that is very good,” said
Jaffray Woodriff, co-founder and chief executive officer of Quantitative
Investment Management, which oversees $3.5 billion. “Funds that are
completely uncorrelated to everybody else and that also trade a lot of
volume are very good for the liquidity of the investment ecosystem.”
That hasn’t stopped some from pointing fingers.
Through Monday, the Nasdaq 100 Index had its worst two-day slide in nine months. Yet the strongest indicator
of whether a stock in the gauge tumbled was not its industry, but
momentum -- or the strength of a share’s gains over the past year. That
kind of proportionality is the hallmark of a systematic strategy that
unwound momentum positions, said Andrew Lapthorne, global head of
quantitative strategy at the bank.
Regardless of quantitative
investors’ behavior, fundamental managers are ceding whatever control
they have left. Gross exposure to U.S. stocks among equity long-short
funds, the largest category of discretionary investing, has dwindled in
2017 to near a record low. The closing out of short positions that
burned managers is partially to blame for that, according to Connors.
Increasing Leverage
Over
the past three months, the most shorted equities have outperformed
hedge fund favorites by nearly 7 percentage points, according to baskets
compiled by Goldman Sachs Group Inc. Meanwhile, narrow leadership has
made it difficult to hold bullish positions on a variety of industries.
“You
can’t get bigger if half of your book isn’t performing,” Connors said.
“They’ve had to be long tech because that’s all that’s worked.”
Then,
there are the quants, who hit the highest gross exposure to equities on
record around May 12, data from Credit Suisse show. It’s since come
down slightly, but still remains elevated. As volatility in the stock
market stays low, returns among quantitative strategies have been
compressed, likely compelling managers to increase their leverage to
juice up returns, Connors said.
Steady Exposure
Likewise, Quantitative Investment Management’s
Tactical Aggressive Fund, a $1.2 billion equity fund, has higher than
average gross exposure, according to Woodriff, who cited the low
volatility and high dispersion environment. That’s paid off, as his fund
rose 13 percent in May to round out a 55 percent gain for the first
five months of the year, according to an investor document seen by
Bloomberg News.
Even so, quants’ exposure tends to be more steady
than fundamental managers, said Maria Vassalou, head of Perella Weinberg
Partners LP’s Global Macro Fund.
“Discretionary managers come and
go, and can affect the volatility of the market more. When they take
risks, they sometimes bet the farm,” Vassalou said. “Quants focus on a
lot of assets that make up their portfolio. They’re less likely to be
impactful overall for any particular stock.”https://www.bloomberg.com/news/articles/2017-06-15/it-s-a-quant-s-stock-market-as-computer-programs-keep-on-buying
Henry Blodget dives deep into two charts from John Hussman.
Based on many different market valuation measures, stocks are extremely
expensive. Blodget does point out that stocks can always get more
expensive in the short term. However, the expected long-term return on a
portfolio of stocks, bonds, and cash is very low based on these
valuation levels.
An interview with legendary investor Jim Rogers. Rogers predicts a
market crash in the next few years. One that he says will rival anything
he has seen in his lifetime. He also goes after the Fed. Rogers says
the Fed is clueless and is setting the US up for disaster. Rogers likes
investing in depressed markets. Rogers says its just like your parents
taught you... "Buy low and sell high. Don't buy high and hope it goes
higher." He is investing in China, Russia, Japan and agriculture. All
these markets are depressed. Unlike the US which is at an all-time high.
Though Rogers says the most important thing is to invest in what you
know.
Billionaire investor Ron Baron thinks Tesla shares have a lot of room to run.
Speaking on CNBC's "Squawk Box"
Tuesday morning, the founder of Baron Capital said, "I think it is
going to be about $500 to $600 next year, and I think it is going to be
$1,000 in 2020."
At that time, Baron said, he expects
the company to have $70 billion in revenue and to be earning $10 billion
in operating profits. By 2020, the company expects to be selling 1
million cars per year.
Baron is a major Tesla
shareholder. He said he bought about 1.6 million shares about 3½ years
ago, at an average share price around $208 to $210.
Baron said he does not think
other car companies can catch up to Tesla's electric vehicle technology.
But tech firms, some with deep pockets, are also moving in. Tech giant
Appleconfirmed it is working on autonomous driving on Tuesday, making it another of the several firms that have publicly discussed such plans.
Morgan Stanley
Morgan Stanley
