Taal selectie


Shale is the name of the game

October saw the spot WTI oil price move from USD 73.25 per barrel to USD 65.31, an 11% drop! The XOP index of US shale producers was down 16.7% and our selection of stocks shed 18.6% – erasing almost all of its year-to-date gains.

CrudestocksSource : Bloomberg

Although the crude price continued to weaken during the first week of November, losing another 8% to USD 60.19 per barrel, shale oil stock prices stabilised.

While their October pullback can be explained by the general (temporary) stock market sell-off and the specific features of the shale niche (limited liquidity and mainly a hedge fund playing field – read also our investment letter on this topic), understanding the sharp drop in the oil price is far more difficult.

Oil demand exceeds current production and oil inventories continue to contract worldwide, with the US an exception due to pipeline capacity problems in the Permian basin. Part of the oil from this major production area cannot reach the coast to be exported, so must be stored for the time being. China, one of the large US shale oil clients, also reduced its purchases in October in a form of silent retaliation against trade tariffs, which obviously further added to US oil inventories.

The oil spot price pertains to the marginal barrel (the vast majority of the 100 million barrel traded daily being sold at a fixed price through longer-term contracts). It is very volatile and largely driven by short-term speculators. These speculators are mainly focused on growing US oil inventories, which they see as an indicator of oversupply. As such, in our humble opinion, they are basing their investment decisions on incomplete, not well understood and inaccurate figures. Fears of an escalation in the US-China trade war are also contributing to very nervous short-term trading – depending on President Trump’s most recent tweet or the latest production outlook issued by the Russian/Saudi tandem. But facts remain facts: the global economy is still posting healthy growth, driving up the demand for oil. Odds remain very high that demand will continue to outpace production over the next couple of years, owing to the complete lack of investment in exploration and production since the oil price collapse of late 2014. With some patience, this will also become clear to short-term speculators, liable change their mind overnight as was evident in October. Just a couple of weeks ago they were betting on the oil price crossing USD 100. Right now, they don’t exclude a drop to USD 40…

Meanwhile, shale oil companies continue to grow their production and are generating healthy cash flows. Sooner or later they will be rewarded with (much) higher stock prices.

We took advantage of the (difficult to understand) correction to add to positions. Do bear with us.

(Update : 11.2018)

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