Seeking Alpha

Get Your Portfolio Ready For $80 Oil (Kirk Spano)

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Includes: CVX, CXO, ECA, FRAK, OXY, PXD, USO, XLE, XOM, XOP
by: Brian Bain
Brian Bain
Contrarian, value, Deep Value, Growth
Summary

Oil prices start crashing in October 2018 due to a million barrel overhang in the market due to ongoing Iranian production.

Saudis have decided to pull a million barrels off the market and send the US 500K less. Canada is cutting exports to the US by 325K barrels month.

The long-term equation is that land-based shale production and Saudi spare capacity are going to be able to keep up with growing oil demand globally for next 3-5 years.

Oil should be in the $70-80 range.

The story behind the interview:

Oil prices have taken a beating recently, and related equities have been hit even harder. Should investors run away or jump and potential opportunities? Kirk and Brian pull the curtain back to see what's really going on and how investors can potentially benefit.

For those who prefer to read, my full interview notes are copied below.

Note: Views expressed in interviews and notes are those of interview guests and may or may not reflect those of the author.

Interview notes:

  • The US needs Canadian heavy sour and Saudi intermediate crude to blend with US light sweet crude. After Iran sanctions, the Saudis increase oil exports to the US by around 700K barrels a day. Oil prices start crashing in October 2018 due to a million barrel overhang in the market due to ongoing Iranian production.

  • Saudis have decided to pull a million barrels off the market and send the US 500K less. Canada is cutting exports to the US by 325K barrels month.

  • All of this will lead to a reduction in oil inventories in the US (Over half the global oil inventory is in the US), and this will drive WTI prices up.

  • The long-term equation is that land-based shale production and Saudi spare capacity are going to be able to keep up with growing oil demand globally for next 3-5 years, hard to know what oil demand will be later into the 2020s. Supply and demand will be in balance at this point and into the late 2020s, and after that, will end up back at a surplus. Oil should be in the $70-80 range.

  • This is assuming no wars or government collapses (Venezuela).

  • Can now ride price up to $70 using USO (USO) and options on USO, do not use leveraged ETFs.

  • Focus on companies with the best land and low debt

    • Encana (ECA): Market did not like Newfield acquisition. Great assets in Permian and Eagle Ford and now in Bakken that they will sell to another large producer. Shell (NYSE:RDS.A) has said it wants to buy assets in all the places ECA has recently acquired. Takeover target.

    • Occidental (OXY) instead of Chevron (CVX) and Exxon (XOM): Takeover target

    • Pioneer (PXD): Becoming a Permian only company. Buybacks, dividends. Takeover target.

    • Concho (CXO)

  • More pipelines will be built in the Permian to deal with growing supply. Permian oil is probably double what previously thought according to US geological society. By end of next year, the US will be OPEC free.

  • Shale will keep getting cheaper as tech gets better, and this will offset costs and allow companies to be profitable and $45-50 oil.

  • Another ETF to consider, XOP, as a well-diversified option. FRAK (FRAK) is an option but probably not as good as XOP.

  • Stay away from super-high debt companies because they will never pump enough oil to cover debts.

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Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of principal. Brian and Investor in the Family make no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Brian and Investor in the Family will be met.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.