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Looking for gains in oil? Take your time

Oil barrel and dollar bill

Oil barrel and dollar bill

by GS Early

I’ve been watching the news from the energy patch for quite a while, but never more intently than I have in the past couple of years.

There are reputable bears that predict $13 barrels of oil and rosy optimists that swear oil will be $100 a barrel by Christmas.

I’m not interested in joining anyone’s camp. I look at the facts and see if there’s a trend. And then I determine whether it’s a short-term or long-term trend. Only then do I start to look for opportunities as an investor, not a trader.

One thing you learn very early on in the investing game is that it’s very dangerous to call a bottom. But I’m calling the bottom for oil now.

While this doesn’t mean you should go out and buy any energy stocks you can find, it does mean there seems to be a number of short-term and intermediate-term factors that indicate that, barring some massive global economic surprise, oil will find its level around $50 a barrel for now.

Yes, it may sink into the low $40s or test $60, but at $50 a barrel one thing is true: U.S. producers can make money again.

What proof do I have? Well regarding U.S. producers there are three pieces of news that reinforce this view. First, U.S. rig counts have been up for two consecutive months. That means prices are close enough to break even to get the rigs back in production.

Second, fires in Canada’s oil sands region and violence in Nigeria has taken that supply off the market during the most demand-heavy season in the Northern Hemisphere.

Third, it’s been reported that Saudi Arabia’s export revenues dropped by half in 2015. Saudi Arabia produces the cheapest oil in the world, but even it can’t sustain that kind of revenue loss. The U.S. Energy Information Agency states that in 2015 Saudi Arabia saw oil revenues of $130 billion. In 2014, revenues were $247 billion. These are the lowest revenues earned by the Kingdom of Saudi Arabia since 2010.

There’s no way the Saudis can sustain this overproduction. They are funding wars in Syria and Yemen and trying to keep its own population calm. None have any end in sight.

It would be in the Kingdom’s interest to move prices higher in order to pay for everything it needs to remain in power, both internally and in the global picture of OPEC.

There’s also the fact that Marathon just bought an Oklahoma-Kansas focused energy producer for $888 million. Devon Energy also recently bought Pioneer Natural Resources for $858 million. Big players are starting to snap up weaker players that can’t buy any more time from the banksters or investors.

They don’t buy until the bottom is near. As a matter of fact, it’s this kind of action that determines a bottom.

But don’t get too excited. Just because oil will stabilize doesn’t mean the price will bring the boom times back.

That will take time.

For now, it means that we watch the energy markets, see how global growth is progressing and see if merger and acquisition activity picks up.

Then, after another quarter or two, we can start to move back into midstream plays that are structured as master limited partnerships (MLPs). They treat investors as partners and throw off profits as dividends. Midstream firms are basically pipeline companies that are toll takers on the energy highway.

As reserves fall and demand grows the pipeline companies will be the first to see real gains.


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