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Oil: Fasten Your Seatbelts

ValueAnalyst profile picture


  • Oil prices plunged by 43 percent.
  • Oil rig count is starting to plunge.
  • Has this happened before? Yes, it has.
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After halving in less than three months, oil prices seem to have stabilized:

The sudden reversal in the last month, I believe, is the prelude to another and larger upward move for the reasons I discuss in this article.

Inventories Are High, But...

The key reason why oil prices plunged by 43 percent is illustrated in the following graph:

From mid-July through September of 2018, the total U.S. Crude Oil and Petroleum Products Stocks increased rapidly by 70 million barrels, or by one million barrels per day.

This increase in total oil inventories was, in large part, driven by the jump in OPEC's production output by, you guessed it, one million barrels a day in July.

...Declines To Resume

In December of 2018, OPEC agreed to a bigger-than-expected production cut, which is now starting to reflect in shipments to the United States:

The above table from the EIA's most recent Weekly Petroleum Status Report shows that Net Imports (Including SPR) dropped by 1.0 million barrels per day from the prior week, specifically because of lower imports, whereas exports from the United States have remained relatively stable in recent periods.

As a result, total U.S. oil stocks dropped by 4.8 million barrels last week:

Weekly Oil Inventories

Because production cuts only just started to bite, I expect the rate at which oil inventories decline to increase in the coming weeks and months, but this is not the only reason why oil prices will resume their multi-year upward trend.

Related image

U.S. Oil Production Growth To Halt

The following graph superimposes Brent crude oil prices on top of the recent trend in US oil rig count in the last 12 months:

As a result of the rapid drop in oil prices from October through December of last year, I

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This article was written by

ValueAnalyst profile picture
You'll never see me write a long bio listing all of my credentials and degrees or refer to myself in the third person. I love discussing ideas and I appreciate it when people can play devil's advocate without resorting to personal attacks. In short, I employ a long-only, long-horizon, focused value style, guided by thorough bottom-up research and backed by years of accounting and finance experience. When people ask me "what do you do?" I assume they mean for fun.

Analyst’s Disclosure: I am/we are long TSLA. 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 (22)

Value Anslyst, since you believe ICE vehicles will not exist because everyone will buy Teslas, obviously oil is overvalued on its way to zero
pro8 profile picture
Actually TESLA is overvalued and on its way to zero.... NG is the fuel that will pwr fuel cell electric vehicles that replace all batt only vehicles....
earlyriser profile picture
VA, I have been right on Tesla, but way early on oil. Now oil looks like a 2020 event. Still long ESV in a small way. ESV debt in a much bigger way.
ESV debt is fairly interesting. 2026 bonds yielding @ 12% p.a.
earlyriser profile picture
I own the 2021 and 2024 debt. 2021 is good as gold. 2024 is a bit more challenging.
Squabkiller profile picture
Russia should shortly start to reduce their production.
I want more oil and low prices. It is more evil fun to be a bear.
nullpos profile picture
target is 10 bucks per barrel before the end of the year. Would be interesting to know your target.
Does target mean what I think it will go to or what I want it go go to?
nullpos profile picture
This is the corresponding price with USD index at 115-117 range. Go to historic charts and see oil price in XXI century yourself.
Texacokid profile picture
What about the 8,594 DUC Wells out there?? That’s a record amount of untapped production in the bullpen waiting to come online.
Squabkiller profile picture
with no pipelines?
Texacokid profile picture
Pipe in Permian coming in 2H, pipes coming from Canada also in 2H. But my main point was with all the DUC’s rig count isn’t only driver of productions.
Brian C. Nelson profile picture
Those DUCs are not cheap to complete to get online. My guess is roughly $40 billion.
So other than Tesla, what do investors purchase to profit?
Squabkiller profile picture
Thank you, I’ll look at it
ValueAnalyst profile picture
I think Tesla is the only way to play energy; sorry that I don't have a better answer to your question.
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