Maybe Oil Will Now Get Its Rise

We are thinking that this previous post (link here) has a decent probability of happening now.


 ** This blog is used for opinions and ideas and should not be used as a direction to act without doing your due diligence.**

CNBC Interview Supporting Oil War Thesis

The following CNBC Closing Bell interview between John Kilduff of Again Capital and Kelly Evans shows that the thesis on tensions being the only major catalyst for a rise in oil prices is growing in popularity.

The link to our story is here.

The link to the CNBC interview is here.

** Please due your due diligence. These are opinions and should not be acted on without your own research.**

Oil's Coming Transition from Autos

by Michael Keane

It seems as if the car industry is moving off of oil, thereby creating a great question. What are the plans for the major companies? One guess is that they (the major ones) just squeeze out the smaller companies through market capitalization moves and let the next generation deal with the issue in a more head on way. Another way is to create a global situation where war hurts supply while driving up demand in the short term and let the next generation deal with the issue in a more head on way once peace is around again. A third option is to be pivot to the coming rocket industry while still supplying the current need in the car industry.

The first two options are classic and will end in general failure for the company and their investors (who is probably anyone holding a retirement account of any kind). We have seen both options used in the past. We can even see them being used right now in different industries. In terms of the war choice, the Iraqi war can be considered such a war. It brought oil prices up around $100 per barrel, for the price to crash back into the 30’s and 40’s when peace has a greater global hold.

The rocket industry is growing at a very high rate. New companies and new technologies at existing rocket companies are driving this industry forward. SpaceX continues to innovate and increase the number of flights to space. International flights are becoming more common.

There was shift in the oil refining industry 100 years ago that is important to look back on. Most oil was refined into kerosene back then for lighting purposes. That was the key revenue driver. But when electricity came to be found as an alternative, what were oil companies to do? The ones that were led by innovators like Rockefeller did not whine and cry. They did not put all their productive energy into trying to inhibit the electric industry’s ability to innovate the lighting space (although some energy was placed there). No, they researched and found autos to be their next big client. The oil industry today needs to take the same approach when it comes to electric vehicles. They are not going away. Move on to the next opportunity. It looks like rockets.

The oil industry is at a pivot point. The transition from autos being the heavy client to another entity being the heavy client looks more likely each day. The question is will the transition be peaceful or bloody.

WAR (and nothing short of it) Will Raise Oil

Six months ago, OPEC and some non-OPEC oil producing countries agreed to cut production in order to raise the price of a barrel of oil. The main reason for this is that in just 8 short years, the price of oil has fallen from $130 per barrel to now just under $50 per barrel . But six months into the process, oil producing countries and companies are starting to figure out just how tough this endeavor will be. Countries and companies alike have shut down production to their economic limits and have found that this has not raised the price of oil enough to their satisfaction. The continued pressure on the price of oil is both a supply and demand issue. Some of the problem can be attributed to more oil having access to get to the market. Also, the demand algorithm around the world for oil is changing with sustainable sources grabbing an increasing larger part of the market.  

Not 10-15 years ago, the world was of the opinion that the oil supply would likely be used up in a couple of generations. Prices were over $100 per barrel for more than a few years. Is anyone familiar with Hubbert’s theory of “Peak Oil”? This first gained major traction in the 1970’s and again in the 2000’s as the price of oil reached over $100 per barrel. The main issue that constricted the supply of oil were the wars in Iraq and Afghanistan. It removed them from the marketplace. Also restrictions on Iran also left their oil generally off the market. Now that both Iraq’s and Iran’s oil is back on the market, prices are falling. Also, when the market was riding $100 per barrel, the US market has increased production with the Dakota Bakken fields now reaching the market. Now, without conflict removing oil from the market, and increased oil production capabilities with shale in the US and around the world, oil will likely continue to have a high supply.

While demand has still increased, it has increased at a slower rate than expected. The reason is mainly that the demand has been stunted by the growth of renewable sources of energy. It is getting hit with vehicles on a growing macro level. I touched on this in an earlier post (here). This success has spawned new technologies in other industries to find out new non-oil ways of manufacturing.  

This all leads to the reason behind the post. The only likely action that will successfully bring back the price of oil to higher than $50-60 per barrel is war. War between countries creates a situation that restricts supply and kicks up demand. It is not a coincidence that the price of oil dropped considerably as military operations in the country slowed down starting in 2008. Supply increased and demand from the US military declined. Most of the big oil producing countries (Russia, Saudi Arabia, Iraq, Iran, Kuwait, etc.). are dependant on oil for their GDP growth. While there are areas of the United States that are dependant on oil, the country as a whole is diversified enough to handle the downturn in prices. These countries should be watched carefully over their behaviors in order to raise the price of oil. One important lens that needs to be used when analyzing certain countries actions is the “price of oil” lens. If these production cuts don’t raise the price, watch out for the bombs.