Long Term Energy Play

[Longstreet]

Is the time nearing when a long term energy play in the variable portfolio would make sense, or has the bottom not been reached?  Short term there may be more room to drop, but I'm thinking 3-5 years out the industry has big profit potential, so why not buy low?  I'm attracted to the MLP ETF's (EMLP, AMZA), but perhaps XLE would be a more diversified choice?

[sixdollars]

Thoughts on COP? XOM?

[MediumTex]

Thoughts on COP? XOM?

Any long term energy play needs to be based on an understanding of the long term world production profile of conventional oil and the short term spike we are seeing right now in the production of shale oil.  Basically, we are seeing an unanticipated spike in overall world oil production that is masking the precipice of a long term decline in overall production.

If that is the macro environment, then any oil producer would be subject to the same risks as a gold mining company--i.e., high fixed costs, political uncertainty, uncertain economic environment, and, most importantly, a rising per barrel cost of production.

To me, a good place to look for energy-based opportunities would be small companies producing equipment that is needed to operate in harsh offshore drilling environments.

I think that history will show that the best days to be in the fossil fuel energy business were when world oil production was rising.  Once production starts falling, a rising per barrel cost isn't helpful if production costs are rising even faster, which has sort of been the story for the last few years.

The trouble with oil prices is that the whole world economy was built around the notion that oil would always cost $50-$100 per barrel in 2015 dollars, and thus when oil starts rising above $100 per barrel it creates economic headwinds that tend to create or worsen economic recessions, which then cause energy demand to soften, which can push oil prices down dramatically.

The financial crisis is what gets all the attention from 2008, but I've always thought that the run up in oil prices was the real catalyst for the economic crisis, and the bankers were simply the people sitting in the seats when the theater caught on fire.

This chart tells an interesting story.  Notice how every oil price spike since the early 1970s has coincided with a recession, and notice, too, how the two times oil has breached $100 per barrel in real terms (1979 and 2008), it has set off an economic calamity.



See how unemployment tracks oil prices with about a one year lag:

[ochotona]

Here in the oilpatch, we think 2016 will be a painful year, as bad or worse than 2015. Maybe keep your money until 2017? XLE should be good. Maybe buy when it pokes it's head above the 200 day MA, it has been below that since September 23, 2014.

[sixdollars]

Thoughts on COP? XOM?

Any long term energy play needs to be based on an understanding of the long term world production profile of conventional oil and the short term spike we are seeing right now in the production of shale oil.  Basically, we are seeing an unanticipated spike in overall world oil production that is masking the precipice of a long term decline in overall production.

....

I think that history will show that the best days to be in the fossil fuel energy business were when world oil production was rising.  Once production starts falling, a rising per barrel cost isn't helpful if production costs are rising even faster, which has sort of been the story for the last few years.

I definitely agree with you here, and I think this image speaks for itself:



It also seems that, with the characteristic fast depletion profile of many shale plays, we can't really expect the peak of shale oil in the United States to be that much further away (unless we've already reached it).  This doesn't bode well for global oil production (sounds like peak oil is near?).  Thus, I wouldn't really consider oil companies for long term investment... but how about a play within the next 5-10 years? (medium to short term?)

If that is the macro environment, then any oil producer would be subject to the same risks as a gold mining company--i.e., high fixed costs, political uncertainty, uncertain economic environment, and, most importantly, a rising per barrel cost of production.

...

The trouble with oil prices is that the whole world economy was built around the notion that oil would always cost $50-$100 per barrel in 2015 dollars, and thus when oil starts rising above $100 per barrel it creates economic headwinds that tend to create or worsen economic recessions, which then cause energy demand to soften, which can push oil prices down dramatically.

The financial crisis is what gets all the attention from 2008, but I've always thought that the run up in oil prices was the real catalyst for the economic crisis, and the bankers were simply the people sitting in the seats when the theater caught on fire.

I agree very much with a lot of what you've said here as well.  The real reason I sought out the PP (initially) was actually because of these concerns I had with peak oil and basically covering my butt.  I have a much better appreciation for the PP now and would probably stick with it regardless of this concern, but the connection that I haven't been able to make yet is whether or not there is profit to be made on the downside of the oil production curve by investing directly in the industry.  I very much expect there to be surprise bumps (short-term) in production that might make oil companies appear profitable again.  I figured the high cost of oil would rise to help facilitate production.  I guess the connection I am failing to make is how price and cost interplay in the real world with a finite resource that seems absolutely crucial to running the current global economy.  The amazing dependence that we have on oil and similar energy dense/portable fossil fuels made me think that even on the downside of the production curve that there must be considerable opportunities for profits.  Even if the overall economy is facing headwinds and declining, isn't there still the possibility that oil companies could turn a profit for a while longer?  A lot of people were surprised at how long oil was able to stay at $100 a barrel, couldn't it settle at a new high and facilitate another round of overproduction as unprofitable sources suddenly become profitable?  This one's hard to predict... but I think I would expect our economy to enter a new era of volatility, but beyond that my understanding is foggy.  There's also the eventual EROEI concern...

I'm not sure how to quantify those risks at all though.  I'm interested in discussing this in more depth (if other people are interested as well); however, looking back in the "other discussions" section, I see that Peak Oil has already been discussed and that a lot of people don't have much more to say about it.  Others still don't seem to even like to hear it brought up.

I'm very interested in hearing about any other insights you might have though, and would never turn up my nose to a discussion of how today's world trends might shape our future.

[mathjak107]

i bought Exxon yesterday at the low . i don't usually own individual stocks and in fact it is the only one i own .

i think with lower oil prices possibly coming they can benefit by buying up the better small producers who get their credit lines cut as banks are doing and put at risk of failing .

with Exxon's resources i think this may be a bargain at this point and they are the baby thrown out with the bath water .  .

[iwealth]

I can't stop staring in wonder at some of the pipeline MLPs and their MLP or C-corp general partners like KMI, EPD, WMB/WPZ, ETE/ETP, MWE, TRGP/NGLS, OKE/OKS, etc, etc.

[mathjak107]

i think they will be less depenent on oil prices in the end that oil suppliers .  i always liked kinder morgan .

[ochotona]

Old thread. Oh, we thought in 2015 "surely the bottom must be in" for energy. Surely!

Sorry... Five more years of Hell, and it's not over by a long shot. But I think we're close to the true button now. Western Canadian Select crude is $5. Alberta tar sands? $0. No bid.

I did buy XOP ETF oil and gas producers. For 9.5 cents on the dollar relative to 2014 highs. That's a brutal beating. It's 1% of the portfolio now.

[pmward]

Old thread. Oh, we thought in 2015 "surely the bottom must be in" for energy. Surely!

Sorry... Five more years of Hell, and it's not over by a long shot. But I think we're close to the true button now. Western Canadian Select crude is $5. Alberta tar sands? $0. No bid.

I did buy XOP ETF oil and gas producers. For 9.5 cents on the dollar relative to 2014 highs. That's a brutal beating. It's 1% of the portfolio now.

Reminds me of the famous saying "the market can stay irrational longer than you can stay solvent"

[Kriegsspiel]

Alberta tar sands? $0. No bid.

Heh

[ochotona]

People in Alberta are politely going feral.