Chevron Chair and CEO Michael Wirth isn’t going out on a limb.
With Brent crude sitting at $92 per barrel, the executive at one of the world’s largest energy firms projects we’ll see triple-digit crude prices by the end of the year.
The reason?
Supply.
On the global front, demand remains robust. Markets anticipate global demand will top 100 million barrels per day next year.
So… why is everyone cutting production?
OPEC+ — the global cartel with its finger on the button for global supply — has engaged in rampant production cuts over the last few months. Saudi Arabia, the cartel’s largest member, voluntarily decided to cut its production by a million barrels per day through the end of the year.
Russia is reducing its output — and keeping supplies domestic — to maintain lower costs for farmers as they wrap up their harvests. Libya is experiencing supply disruptions due to massive flooding after a dam broke. The country had been producing about a million barrels per day in August. They won’t be able to get a lot of crude out of the ports.
And then there’s the curious case of the United States. The number of U.S. oil and gas rigs on Sept. 8, 2023, hit 632. That’s down from 759 at the same time in 2022.
The U.S. has run down its Strategic Petroleum Reserve to levels we haven’t seen since the early 1980s (when it was increasing). Refiners are buying up everything they can — drawing down private stocks as well. As we kick into the end of September, U.S. farmers face much higher diesel fuel prices.
Where Oil Heads Next
The cure for high commodity prices is usually… higher prices. But U.S. energy companies won’t make the same mistake they made in 2014.
That’s when oil popped above $100 per barrel on the back of widespread speculation and increasing demand. Producers across Texas turned on the taps. Every CEO tried to make as much money off triple-digit prices by increasing production.
And it ended VERY badly.
Within 18 months, the market was oversupplied and crude prices fell under $40 per barrel.
Shareholders canned many CEOs. It would take years for prices to recover.
Around 2018, new CEOs and the ones who survived had to make a decision. If they didn’t start enhancing shareholder value, a lot of big investors and funds were set to dump their stock.
So they started increasing buybacks… hiking dividends… and paying off debt with cash flow. Instead of ramping up production and investing in new wells, they turned their attention to recovering stock prices.
While COVID-19 disrupted that rebound for a brief period in 2020, companies have been exercising capital discipline as the priority. This is evident by the countless oil-and-gas producers that have F scores of 7, 8 or 9 right now. The F score is a nine-point metric that focuses on improvements in the balance sheet. High scores are very common in the energy space right now.
Oil producers aren’t going to hike output. Not only is it bad right now for shareholders, it isn’t politically feasible either. Certain leaders in the Biden administration have openly advocated for ending U.S. oil production. The Bureau of Land Management, for example, just shut down future Alaska production, despite congress authorizing the permitting.
Most oil wells have long-term payoff periods ranging from 20 to 30 years. But if the government is trying to ban gas-powered vehicles within 15 years at the state and federal levels, then their return on investment won’t work.
What’s Next
I don’t believe oil prices will sustain above $100 per barrel for an extended period. However, I am raising my floor on oil investment.
I’ve long advocated that energy investors put money into companies on the expectation that oil would trade between $70 and $75. But now, I expect the floor to increase to about $80 per barrel.
One of the best ways to know what stocks to own in the energy patch is to focus on a specific metric I use. I’ll talk about this at 2 p.m. ET on Tuesday, Sept. 19 — join the fun here! — and offer some deep insight into the investment opportunities in places like Texas and Colorado, where production costs are cheaper.
Margins are expected to remain robust for energy producers in the future. Don’t get overly distracted by the cost of oil per barrel. Instead, focus on the companies looking to bring production down.
A company that can produce oil at $25 per barrel and sell it for $80 will make a lot more money than a company producing at $60 per barrel and selling at $100.
Be sure to join me tomorrow at 2 p.m. ET.
Chat soon,
Garrett Baldwin
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
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Market Momentum is RED
The markets are trying to rebound today as we head toward the next FOMC meeting and rate decision on Tuesday and Wednesday. It wouldn’t surprise me to see the market get a little bounce heading into Powell’s speech. But from there… all bets are off.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
