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Here's Why Oil Is Headed To $80

Jan. 15, 2019 1:46 PM ETCVX, EOG, FRAK, OXY, USO, XOM, XOP, OIL-OLD102 Comments


  • The oil sell-off was extremely overdone and anticipated scenarios that are very unlikely to occur.
  • Saudi Arabia's power to control prices intermediate term is vastly underappreciated by shale struck traders.
  • Canada cutting oil exports to the U.S. is one part smart for them and one part "Trudeau's Revenge!"
  • Oil inventories have been showing draws and those draws will increase dramatically in January and continue thru about July.
  • See the 2016-17 oil charts for clues as to what is coming in 2019.
  • This idea was discussed in more depth with members of my private investing community, Margin of Safety Investing. Start your free trial today »

Margin of Safety Investing With Kirk Spano

In early 2016, on MarketWatch, I suggested oil was near its bottoms after the OPEC induced oil supply glut. I also said that oil would rally back to the $80-100 per barrel range within a couple years.

My thesis was simple. Investment in long-term slow cycle oil production, such as deepwater and oil sands, had been permanently impaired. This would lead to a "peak oil plateau" that would see oil demand and supply roughly in balance from about now until EVs started to impact oil demand.

By October of 2017, we could see oil's technical path to $80 per barrel.

By April of 2018 we saw oil at the doorstep of $80 per barrel.

WTI oil traded in the upper $60s to middle $70s from May 2018 through October 2018. It hit its high price for the year at $76.40 per barrel. Brent crude peaked at $86.07 on October 4th.

The path of WTI crude oil followed a steady rise from its bottom in early 2016 until the recent correction.

WTI Crude Oil Price ChartYou can see that the price of WTI crude oil has gravitated towards about $80 per barrel so far this century. It is likely to embark on an emphatic price rise towards $80 per barrel in the first half of 2018.

The Trump Double Cross And The Oil Correction

The recent precipitous drop in the price of oil was not caused by the rise in U.S. oil production. Rather, it was caused by a surge in "ROPEC" oil production that was ramped up to counter the Iran sanctions.

With more and bigger waivers for Iran oil granted by the Trump Administration than anticipated, Saudi Arabia and Russia were caught flat footed as their production reached record levels. Since "ROPEC" unwound production cuts in June, their oil exports also ramped up.

Margin of Safety Investors also received option trades for their oil strategy. To learn more about us, take a free trial. Our New Year's promotion is still running and you can receive your first year for 20% off the regular rate.

This article was written by

Kirk Spano profile picture
Kirk Spano has managed money since the 1990s avoiding 3 major crashes, while creating income streams and finding high upside opportunities. He continues to manage wealth at his boutique investment firm and also consults for hedge funds and private equity. His passion is helping hardworking people make more money with less risk. Kirk is the leader of the investing group Margin of Safety Investing, where features include: the Quarterly Outlook & Game Plan, a monthly Global Trends ETF Report, access to the model portfolio & weekly research, buy & sell alerts, option strategies for cutting risk and retirement income, and chat. Learn more.

Analyst’s Disclosure: I am/we are long FRAK, XOP, USO. 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.

I own a Registered Investment Advisor - Bluemound Asset Management, LLC - however, publish separately from that entity for self-directed investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (101)

Coming up on 4 years since your early 16 prediction of $80 oil in a year or two.

Here's what went down (source EIA, annual WTI Cushing spot)
2016: $43
2017: $51
2018: $65
2019 (YTD): $57

So much for $80 oil...

Oh...and the Trump double cross can't bail you out for a 2016 prediction. Because there were no sanctions in 2016. And the exemptions are over now.

Another permabull squashed by shale. Coming in on 13 MM bopd. USA! USA!
Eleven months later how does this look. I sometimes go back and see how wrong people were since 2015. So many people calling for low oil price to cure itself. Recovery right around the corner. How did so many get it so wrong?
Michael Borisov, CFA profile picture
I read an article recently (sorry, totally forgot the source) where an expert likened Trump tweets re. oil to the "Fed put" (an idea that whenever the S&P500 gets in trouble, Fed loosens monetary policy).
However, with the opposite sign, i.e. a "Trump oil call": whenever oil price rises, Trump tweets and/or releases SPR to limit the upside, making the return profile negatively skewed.
Kirk Spano profile picture
Oil is up over 20% this year.
45 to 55. Woot!
Squabkiller profile picture
What did you make of the last big build in storage? I thought SA was not shipping oil here?
LuvMyBonds profile picture
A very fragile supply chain just became more fragile: video.foxnews.com/...

(MBS is pissed)
Quality shale oil producers have become buff, flexible, and disciplined by hard knocks. EOG's entire 2017 drilling and completion program paid out by Sept 2018. With just $50 oil (already back) and $3 natgas, EOG expects their 2017 program to generate more than 100% after tax rate of return.

The eagle-eyed stock picker can add other smart shale-oil producers: Concho, Pioneer, Diamondback, etc.. Some of the majors have emerging shale-oil units with beautiful leasehold in plush Permian acreage: OXY, the XTO unit of ExxonMobil, Chevron, and others.
average price of oil in 2017 - $52.51, 2018 - $70.66
Seriol profile picture
Had to check to see. WTI is the relevant benchmark here.

2017: $51. 2018: $66


Given production costs of, what, $35, margin doubled. We see falling production costs year after year. Might be $30 this year.

damonhill profile picture
With shale producers cutting back and OPEC cuts going full force we should expect a more bullish case for oil. But if oil makes it to $80 then expect producers to go into 'overdrive' production mode which will once again flood the oil market and create the next oil glut.

'U.S. Crude Producers Won't be Fooled Again'
Trust us. We won't overproduce if prices get high. We learned our lesson in 2016. Go ahead and cut Saudi Arabia. Would we lie to you, baby?
damonhill profile picture
Did you read the article? Specifically the part where lenders are saying 'no-more money; live within your cash flow'?

'This comes as the FT reports that: “Capital raising by U.S. oil exploration and production companies has fallen sharply following the decline in crude prices that began last October, pointing to cutbacks in capital spending budgets and a continuing slowdown in activity.” The FT says that “Companies in the sector have not held a single bond sale since the start of November, according to Dealogic, while share sales have also slowed.” The data suggest that after a record-breaking boom in U.S. oil output in 2018, growth will be weaker this year. Many shale companies are saddled with debt and rely on debt to grow production. Lenders and investors are leery of lending many shale operations money when they still must prove that they can make money'
EOG and many others get payout in 18 months. They make profits.
Montie Carr profile picture
BP continues to use $55/brl as their base price.
Inversiones Apartado profile picture
I agree $80 a barrel is overly optimistic. Brent will likely reach $70 and then remain range bound. This contributor was calling $100 oil and it fell to under $50, based on his historical performance and inability to even understand basic industry fundamentals it might be time to call for $40 a barrel?
Inversiones Apartado profile picture
WTI - $59 bbl, Brent - $64 bbl, $80 no where in sight and wihtout OPEC's latest announcement to shave another 500k bbl daily off its production oil would be $5 to $10 bbl lower.
Kirk Spano profile picture
So, mistake on Canada oil. Is a production cut to reduce their inventory, not an export cut to reduce U.S. inventory. Effect has similar impact in my view. North American inventory shrinks. Spread for Alberta crude has narrowed dramatically while WTI has risen sharply off bottom. See this WSJ article for update on impact: www.wsj.com/...
Thank you for pointing out the flaw. I still think Trudeau’s Revenge is pretty fun. Of note, by summer, Canada will add a bit of train capacity to support slightly higher exports of oil to U.S. That supports my thesis that America could be essentially free from OPEC late this year - though Saudi Arabia will continue to support Motiva/Port Arthur and select customers, as other OPEC oil will find its way here in a more competitive environment vs dependent.
17 Jan. 2019
Please don't credit our idiot Prime Minister Trudeau with any plotting or revenge abilities, except to undermine our energy industries at every opportunity.

He has cancelled one pipeline (Northern Gateway) through enacting a ban on oil tankers in northern B.C. waters and helped kill the (Energy East) by implementing, at the last minute a requirement that the pipeline assess upstream and downstream C02 emissions, in its environmental overview. Something that no other project has required in the past including
the import of roughly 1 million bpd of foreign oil to our east coast refineries.

Our cutbacks are a product of our Alberta Premier Rachel Notley, who through industry input and pressure is correctly forcing private industry to cut a little under 9% of our production. The resulting cuts have reduced the heavy differential to fall from highs approaching $50 to the current sub $10 range.
Thanks for the article.
I think Kirk's analysis is spot on, particularly in regard to the impact of the modified 2018/June ROPEC production agreement. During the first of 2018, oil inventories had continued to steadily decline although at a slower pace than 2017. Oil prices were moving higher. That all changed due to the ROPEC production surge during the second half of 2018 and Trump's double-cross in regards to the Iran waivers. Without the modified 2018/June ROPEC production agreement, oil inventories would be significantly lower today and oil prices significantly higher.

Where do we go from here? I personally wish the most recently announced ROPEC production cuts were a lot higher than 1.2 mbd. Saudi Arabia and UAE could have easily cut that much by themselves and driven ROPEC oil production back to the levels seen during 2018/1H. That would have also immediately driven Brent back to $ 80, recaptured all the lost ROPEC oil revenue and taught Trump a lesson. I still expect 2019/1H prices to drive higher, however, because of lower production by Iran, Venezuela and Canada.

For me, Iran remains a very key factor in the oil market today and it will be interesting to see how Trump handles the current Iran waivers (that are set to expire at the end of April). After the 2018/Nov Iran waiver double-cross, I would have assume we won't see a repeat of that fiasco. How do you force Iran to the negotiating table if waivers get extended again? The trade war with China could also be a key factor, where a logical settlement would force China to stop their Iranian oil imports. So we might see significantly reduced oil production by Iran during 2019. Iran's production has been steadily falling, with December at 2.769 mbd after averaging 3.818 mbd during the 2018/1H.

I am currently long USO and BNO. Unless XLE, IYE, XOP, FRAK and OIH can start out-performing SPY, I will be staying away. Oil equities have under-performed the market for a long, long time.
spend my cash profile picture
still collecting my MLP distros, life is good
Hazy... profile picture
BP looks solid... 50% Gas... World price was only?
US 2.15 2.39 (2018 vs 2017 on 9 months production)
Europe 7.33 4.98
Rest of World 4.24 3.42
BP Average 3.77 3.18
If BP made a better price in USA... and Oil didn't move much? A lot less drilling? Price of Gas in USA might Double to $4 due to the World / Mexico / LNG demand... not exactly $10/mcf... but I've got to wonder what it cost BP to produce Nat.Gas? BP says overall Declining Production is only 5%... even with all that Gas Production? which is generally 30% in the USA or Canada... on a single well... " Our long-term expectation for managed base decline remains at the 3-5% per annum guidance we have previously given." BP 2017 Annual Report... Long Life? Low Decline?
Some scientists think that we are entering a mini-ice age. In fact we are overdue for another Ice Age. We may need a lot more oil and gas to heat our homes in coming years. Should be good for my Shell, XOM, CVX, SU, and DVN. Wish I had bought SLB@35 but I bought BTI@31 instead as it was yielding over 8%.
Stay warm!
Actionable Conclusion profile picture

If you are going to back up the truck on oil due to the Ice Age thesis... you may want to reconsider.
Hazy... profile picture
BTI - Tobacco... what a great scam? Oil is so cheap in comparison or Nat.Gas? USA is willing to supply the World with cheap Oil... bananas. Now Weed... grows like a weed... profit margin must be similar to Tobacco? Although security must so much higher... but Growing costs must bananas compared to farming / processing Tobacco. Any chance Grow Lighting will need Fan-tastic Amounts of Power? Maybe Amazon gets into the business...? endless amounts of shipping / delivery...
Absolutely right!! Except that you're talking about 1000's of years in the future. Now that's a long term investment.
I stopped out on esv and ne in Dec............

huge loss.

nobody knows where oil is going in the near future.
bronx54 profile picture
Encana Is Running Out Of Well Locations In The Eagle Ford...
Article in SA today.....Great job Kirk....You might have bought it
at 6 but you didn't recommend it in SA at that price.
most operators are running out of acreage there, even EOG only have 6-7 years left....
Kirk Spano profile picture
I recommended it to subscribers at $6
Where would you price crude if global demand contracted to 95 million bpd with roughly the same proportionate demand region by region?
20-25 bucks for a 1 year average, and supply would collapse by perhaps 3 million b/d per year, mostly from shale.
ErikWilson profile picture
Don’t you think that the Saudis, who can hold back as many barrels as they want to, are now savvy enough (they do have a fleet of world class geniuses giving them advice) to keep the price where they want it? They gross more revenue selling fewer barrels at $60 than they do selling more at $20...way more. Some new found discipline among OPEC members and Russia is also going to help.
Mine is a "do nothing" scenario. Of course the Saudis will cut back and not let prices collapse in that fashion.
api reports another joke draw and massive distillates build. Where are these draws in crude? I think the flaw in your argument is it reliance on HFIR. They've been wrong on price, timing, shale output, KSA's output, impact of trump's tweets, and about what the market is telling us. Always a draw in the future. ridiculous
Kirk Spano profile picture
With the exception of Q4, HFIR and I have been spot on everything. I wouldn’t throw out all we’ve said because Trump pulled a fast one and trading conditions in Q4 helped bears.
If Trumps wants to make Iran great again, he should continue with the waivers, if he wants to make the US (Texas) great again, he will allow the oil price to increase to 70 brent. It is coming.
Actionable Conclusion profile picture
I would like to see Iran great again, and the US great again.

Alas, the power elite of both countries have a way of making things great for themselves and their cronies at the expense of the hard working middle class.
Hazy... profile picture
USA Tax Reform??? Tangible costs related to drilling — such as the costs of equipment used for drilling — have to be depreciated over a schedule of seven years. However, investors enjoy a 100% deduction on these costs... All intangible drilling costs, including labor, are a write-off in the first year they are incurred, as long as the well is operational by March 31 of the following year... Lease cost deductions are written off via a depletion allowance over the term of a lease and are capitalized, it’s possible to deduct the costs associated with buying mineral rights and lease rights. Lease cost deductions also include accounting costs, administrative expenses and lease operating expenses related to acquiring leasing and mineral rights... I've got to wonder why XOM or BP are buying into Texas? Buy vs build... either company has so much land already; mind boggling.
Iran used to be the center of the Persian empire. That was last time Iran was great. Just ask any Iranian and they would be happy to give you a history lesson on the subject. Just don't call them an Arab, thems fightin' words.
Well articulated article Kirk , well thought out and backed up with good reasoning, I agree that the Trump admin pulled the bait and switch on OPEC ( can’t understand why except low prices @ the pump for election) and the fundamentals of the year end rout don’t add up. Thank you sir
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