Why Being An Oil Bull Continues To Make Sense

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 |  Includes: OIH, USO
by: William Trent, CFA

When we last visited the oil patch, we found the arguments against higher oil prices lacking. It remains our view that demand for oil is rising at a faster pace than supplies of oil, and that the imbalance will be solved through the price mechanism. We don’t think the correction is even close to done. However, an article we found in Oil & Gas Journal titled CERA Study Challenges ‘Peak Oil’ Theory suggested it was time to update our analysis. The article states:

The “peak oil” theory, stipulating that world oil production will soon peak and sharply decline, is flawed, according to an analysis by Cambridge Energy Research Associates [CERA]. Instead of a peak, CERA says, production is more likely to trace an “undulating plateau” that will last for a decade or more beyond 2030.

It seems of little consequence to us, as we believe demand will continue to rise without further drastic discouragement through higher prices. Whether supply is declining or flat, it will not keep pace with demand. The article continues:

The CERA report contends that the often-cited Hubbert model, which patterns production as a bell curve, fails to recognize that recoverable reserve estimates evolve with time and are subject to significant change. The model also underplays the impact of technological advances.

Although M. King Hubbert accurately predicted timing of the peak in US Lower 48 oil production in 1970, the CERA study says, he underestimated the peak rate by 20% and total cumulative Lower 48 production during 1970-2005 by 15 billion bbl.

Again, not exactly right is likely to be close enough for our theory to play out.

Finally, we often included a chart of the current days of oil products on hand in the US as part of our analysis. With the recent drop in prices, days of inventory made a run at breaking out of the long-term downtrend. However, the breakout failed and stocks remain low compared to long-term averages.

oil inventory

We’ll stick to our long position in the oil ETF (NYSEARCA:USO).

USO 1-yr chart:

uso

Disclosure: The author is long United States Oil Fund (USO).