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Oil Bulls: What To Think When Reality Bites

Open Square Capital profile picture
Open Square Capital


  • Oil equities have fallen year-to-date, frustrating bullish oil investors.
  • The winter seasonal slow-down in demand, coupled with the volatile market, has disproportionately impacted the shares of weaker E&P companies.
  • Rebalancing continues, and as oil prices inflect, equity prices will inevitably respond.

We see a lot of hand-wringing lately and baggy eyes. Tired energy bulls with tired portfolios, people who are crying in unison. What just happened? How did an incredible December and January turn into a frightening February? Why aren’t our stocks moving higher when the bulk of the oil data is telling us that the oil glut is disappearing (or has disappeared), or that our companies are posting “great” earnings results and paying at least lip service to shareholder returns? Why have the market gods forsaken oil bulls?

Amidst the pleas and rhetorical questions, we have to chuckle - not because we enjoy watching the consternation and psychological pain of other investors, but because we believe this is the process. This is one of the most challenging parts of being a contrarian investor; having to personally reconcile what you see in the fundamental data with what you’re seeing in your portfolios. That chasm can not only confound, but most importantly it can frustrate and tax investors because it’s the difference between your expectations and reality. When those two don't meet, pain always follows (just take a look at the relative underperformance of the ETF XOP relative to the overall market and US oil prices).

Collectively, the market currently believes that energy is an uninvestable sector. We could show you charts, but what’s the point when we know it accounts for one of the smallest % of all time in the S&P. Moreover, why shouldn’t it when compared to the glittering narratives of today’s technology, social media, and “platform” companies, where free cash flow rains down like manna. Why even bother with a dying industry like fossil fuels when obviously, electric vehicles and renewable energy will eventually displace such backward energy sources? Hence investors stubbornly refuse to even consider it.


This article was written by

Open Square Capital profile picture
Open Square Capital, an asset management firm based in Orange County, CA, manages the Open Square Fund, a thematic value-oriented hedge fund.  For additional information please visit our website at www.opensquarecapital.com

Analyst’s Disclosure: I am/we are long CRC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (52)

Really good article, thanks. I do eat oatmeal and am getting too thin.

I see it as follows
World consumption growth say 1.5 mbpd
World oil depletion say 5% x 80 mbpa 4.0 mbpd

Total additional demand 5.5 mbpd

To be met by
Additional Shale oil 1.0 mbpd
New conventional oil maybe 2.0 mbpd

Total new supply 3.0 mbpd

World deficit 2.5 mbpd

Oil has to go higher to encourage more drilling.
Thanks again

Technically, decline only applies to "mature" fields (in decline), not fields that are either ramping when new, or at plateau/peak when volume meets constraints.

This graph is instructive...


Rystad estimated last year that global mature fields subject to decline are approximately 30 MM b/d, and recently estimated decline rates at ~7%.

You can do the math from those inputs (effectively a ~4 MM b/d need when added to new demand growth).

P.S. It's not accurate referring to decline as "demand" (you added it to demand growth and referred to it as "total additional demand"). It is properly thought of as on the supply side of the equation, whereby it reduces available supply from mature conventional fields. However, it is added to new global demand growth to calculate additional supply needed to meet market demands, when evaluating whether the market is in balance, or not.
For fossil fuel income=MLPs, sold out and high yielding.
BigAlpha78 profile picture
100 in 2019..things change very fast in this market.
MuppetBait profile picture
Boslego, you should jump in now there’s room in the boat.
Saudi wants $70/bbl+, so we will see $70/bbl sooner rather than later. It’s very simple.
Robert Boslego profile picture
"This is one of the most challenging parts of being a contrarian investor; having to personally reconcile what you see in the fundamental data with what you’re seeing in your portfolios."

Contrarian investment? It was the most crowded long oil trade in the CFTC data.
OrangeElvis profile picture
The vast majority of investment assets are in bonds and equities. If you look at those two categories, they do not match up with the commodity. I believe the author was referring to stock holdings of energy names.
Viking75 profile picture
Robert- we know you are not a big fan of OPEC and the bs rhetoric but you have to admit that they managed to get the oil price higher. in the last 8 mo. How ca you not actually? Is it temporary? Maybe- but please at least admit that so far they have been impressively successful ... would you have thought in June last year Brent would trade above 65 in March? Honestly Robert.
pgace123 profile picture
I think you are right and have taken a sizable position in oil as a result. I see a lot of discussion on Cramer. I will say that I rather enjoy following Gundlach he rarely disappoints.
Robert P. Balan profile picture
#What really matters is that oil is heading higher whether you believe it or not, and as it continues its climb, our caravan will begin to attract attention. As we cross from $60-65/barrel on higher we cross from the current “zombie company thesis” to “whoa that’s what operating leverage looks like thesis.”#

Very eloquent piece -- kudos to the author. Unfortunately, E&P equity prices have not really been tied to the price of WTI oil for most of the time in the past. They respond more to the real fundamentals of global oil, whereas WTI oil price has been responding more (lately) to the US oil inventories trends. The WTI price has been ignoring oil nuts and bolts fundamentals, but apparently E&P equities are more attuned to the global output, supply and consumption nuances. And will likely do so for the rest of the year.

Great article...so true.
You really have an exceptional writing talent, which truly reflects your passion for investing. Thanks for sharing your thoughts.
tridacna profile picture
Clarity of writing reflects a state of mind and intellect
So... Stiff upper lip???
Great article OSC - Thanks
Great read...anyone out there subscribe to the efficient market theory? Does the current sentiment suggest the rest of the market is wrong?
OrangeElvis profile picture
The market is often wrong in the short to intermediate term.
Krypto profile picture
bmrfan: Warren Buffett once said if the efficient market theory was correct, he would be broke, or a beggar, or something like that.
Thx for the feedback. He has also said “success follows those who are patient, have a grinding discipline and access to info that many may not be privy to.”
River18 profile picture
Excellent article and staying long CRC.
Thanks for the encouraging article OSC. It is difficult to stay the course when things don’t look great ,however, if you take a step back and look at the supply/demand situation and the nature of cycles you realize this could turn out quite well for oil bulls. GLTA
thecloser profile picture
well done
Stick with Cramer? I've made very bad investments based on his recommendations. GE, Decom, SJM, Etc... His callers have some great investments ideas that he dismisses. Surprising article that I thought was another feed the bears story . Enjoyed reading
Krypto profile picture
Calvin: Cramer was recommending JDSU when it had a 100 billion dollar market cap - I don't know if he ever said to sell it in time or not.
MuppetBait profile picture
Excellent, excellent article.
Matthew Wayout profile picture
Great oatmeal analogy
Appreciate the encouragement after a painful Feb -- TY!
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