Brent Breaks $80: The Oil Bull Thesis Enters The 7th Inning

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Includes: ATHOF, BNO, BTE, CRC, CVE, DBO, DNO, DTO, GENGF, MEGEF, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO
by: HFIR

Summary

Brent breaks $80/bbl.

The oil bull thesis is now entering the seventh inning.

While energy stocks are just entering the fourth inning of this bull cycle.

We view the current oil bull market in two tiers, with the first tier ending with oil demand destruction from high oil prices.

The second tier will arrive when the years of low upstream capex eats into global oil supplies.

Welcome to the seventh inning edition of the Oil Markets Daily!

Brent broke out above $80/bbl today following the OPEC and non-OPEC meeting over the weekend that signaled no production increase.

For those of you who started to doubt the oil thesis, you can't blame us for not writing articles to keep you well informed. Even in our public articles, we released every week, we kept readers up to date of the oil market fundamentals, while HFI Research subscribers had one big advantage - real-time question and answers.

Nonetheless, the information was out there, and we warned again and again that the oil bull thesis was not over. In fact, we made it very clear in our write-up posted on August 17th titled, "No, The Oil Bull Thesis Is Not Over." If there was one report that summarized everything over the last three months, it was that article.

With Brent now above $80/bbl and WTI above $72/bbl, we are now entering the seventh inning of this oil bull thesis.

What do we mean by that?

In a special report we published to subscribers, we believe the current oil bull market we are seeing is broken down into two phases. The first tier is what we are seeing right now, and the second tier will come when the massive upstream capex reductions turn into a supply shortage after 2020.

In essence, we believe the current oil bull market we are seeing right now will end with global oil demand destruction resulting in elevated oil prices. We believe the price at which demand destruction starts to take place is ~$120/bbl. This will then send the global economy into a recession, which would cause oil and risk assets to sell-off materially.

In this first tier then, we believe we are now entering the seventh inning.

What about energy stocks?

We believe energy stocks are now entering the fourth inning. The lag between energy stocks and oil prices is understandable. Investors do not currently believe oil prices can stay above $70/bbl, so this slippery perception will be self-corrected when the price action of oil indicates otherwise, which is what we are seeing right now.

Following this change in perception, investors will underwrite energy stock valuations using higher and higher oil price assumptions, and each leg of oil price revision will push energy stocks higher.

We are starting to see this play out, but it will still take some time for the new sentiment to filter through the market.

Conclusion

The oil market fundamentals are signaling to us that oil prices should keep moving higher. With the oil bull thesis now entering the seventh inning, market participants should be ready for the demand destruction thesis that takes over by the second half of 2019.

Meanwhile, energy stock valuations will leap materially higher once investors see that oil prices won't just stagnate forever.

Our favorite energy names are California Resources (CRC), Gear Energy (OTCPK:GENGF) (GXE.TO), Meg Energy (MEG.TO) (OTCPK:MEGEF), Baytex (BTE) (BTE.TO), Athabasca Oil (ATH.TO) (OTCPK:ATHOF), and Cenovus Energy (CVE) (CVE.TO).

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Disclosure: I am/we are long CRC, GXE.TO, ATH.TO, BTE.TO, MEG.TO, CVE.TO.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.