O&G supply "perma bulls" vs cyclical demand bears.
Axiom: LT buy and hold investing doesn't work equally well with all stock market sectors.
Some stock groups, like the Drugs are characterized consistent earnings growth. This makes them reasonable choices to stand your ground with the LT B&H approach, regardless of what the economy is doing.
Other sectors can't deliver consistent earnings growth because their operations are much more sensitive to the economic cycle. Because the O&G sector IS one of them, the B&H approach does not work nearly as well there.
During the boom phase, huge profits are possible as we most recently saw in 1999 through most of 2000. But the example charts below clearly show that failing to exit with your profits in hand somewhere in the vicinity of the major cyclical top and instead "hanging in there" with a fully invested B&H focus literally meant GIVING BACK a large part of the gains from the preceding boom.
First, lets look at the Oil Service Index. As can easily be seen it's inflicted huge losses on B&H perma bulls this year.
stockcharts.com[w,a]whcayymy[df][pb50!d20,2][vc60]
The XNG index contains pipeline and other infrastructure stocks that tend to skew the trend history of the independent oil and gas E&P companies most investors have favored in recent years. In it's place I've tossed together a good mixture of favs that investors here and elsewhere were very successful with during the boom. But look at how much they've given back since the top
siliconinvestor.com
Finally there is the very large cap XOI composed of super giant integrated internationals like XOM & RD.
stockcharts.com[w,a]whcayymy[df][pb50!d20,2][vc60]
Like other large cap indices in the broad market, the XOI has declined less for a number of reasons. Just 2 being:
1. Lg cap indices are the obvious focus operandi of prop job machinations by the PPT whenever it buys index options to prevent a major decline from turning into a broad market meltdown. We've seen that over and over in recent years.
2. The XOI components pay, on average, larger dividends that the OSX or Med & Sm Cap E&P stocks and these dividends support their prices. (Hmmm. Now who was it around here has been recently pounding and pounding about the importance of dividends<ggg>)
Vis a vis O&G supply "perma bulls" vs cyclical demand bears? A recurring problem I see continually on many oil and gas related threads is that posters habitually focus ONLY on the bullish LT supply issues of reduced drilling, depletion, etc.
Sure those issues are valid and worth keeping in mind. But in a recession, the ball to keep your eye on isn't supply which dominates during the boom periods. DEMAND is the 400 Ib Monkey during the recessionary bust periods in the patch. Knowing which hat is PROFITABLE to wear for a year or longer at a time depends on KNOWING where we are in the economic cycle. And the sooner you can recognize those major cyclical economic pivots, the more money you will make over a lifetime in investing.
Recent arrivals here are probably unaware that "a few" here repeatedly and vociferously pounded the table from early January onward about the major collapse in demand that would crush the NG stocks and the rest of the patch along with it. But a large group of longs who were too threatened and closed minded to consider what YTD has long since proven to be one of the most important sector calls of the past several years on or off W.S. just kept baiting and ankle biting until a huge food fight broke out. Much to their embarrassment, this now permanent opposition ended up suffering huge capital losses fighting the downtrend and/or being wipsawed with late entries on minor rallies.
(For those of you puzzled by some of the "in group" terminology we use here. Those lessor lights of the SI firmament now relegated to backwater threads are, on occasion, humorously referred to by us as the "under the porch crowd", "chihuahuas" or "ankle biters" when they get a little testy<g>)
OTOH, there are those of us for whom this is not the 1st oil and gas cycle we've been through. Or even the 2nd or 3rd. And I think this has been a good time to revisit all of the above concept and facts for the benefit of the many new posters we've recently welcomed here who may or may not have long experience in approaching the very economically cyclical O&G stock sector with the appropriate emphasis on demand vs supply considerations in the bust phase of the economic cycle. And trust me, folks. IT AIN'T OVER YET!!!
"Perma Bulls" analysts like Matt Simmons are excellent people to follow in a Bull Market. But buying on the basis of his one sided emphasis on long term bullish supply issues when diving demand in a rapidly contracting global economy is the overwhelmingly dominant driver of prices just exposes your portfolio to losses so large that they result in you giving back most of what you made during the boom phase.
As was the case in 2000, when a huge reservoir of evidence accumulated pointing to the approach of a major top The same will be the case when when THE bottom of this cycle begins to evidence itself. But to date there is NO such accumulation of evidence. When it appears we can discuss it.
But now, the over arching priority is to try and put the pieces together for the period directly ahead. In this post I'll just focus on Natural Gas. If Slider is on the board I'll defer to him on the crude oil markets where he's done more DD than I have. But right now, let's put an historical perspective of where we stand right now and ruminate a tad about what we can reasonably expect between now and year end in NG?
Today, the AGA reported that 25 bcf was injected into storage. That's NOT bullish news.
The table below is very instructive. Let's compare this report, not only to the same week last year, but also follow the row from right to left and look at previous years. What we see is EVERY other year listed shows net draws from storage.
Next, do likewise for the smaller add reported last Wednesday. Looking right to left across that row provides further fundamental confirmation of just how bearish the present supply situation is. 5 our of the last 7 years show draws - some quite large:
highlandenergy.com
For those of you who prefer graphic to tabular information:
highlandenergy.com
Ouch. Storage is hitting multi-year record highs after weeks of mild weather in the critically important NG consuming region of the US mid-West. Any relief in the extended 10 day temperature forecast?
grads.iges.org
Nope. Not yet. The map shows more moderate to milder than seasonable weather for most of that key region.
Bottom line is whether we look at the still contracting economy, the storage situation or the recent and soon to arrive weather, the information is all bearish.
Let's face it, unless lightning strikes, i.e. a big big freeze or some external event, this could get VERY NASTY for longs in the NG stocks as individuals often wait till the final month or two of each calendar year for a significant portion their tax selling.
IMO it's still too early to buy or even hold any large positions in this sector. But we could see some great opportunities nearer the end of the year at lower prices. Patience and cash is key till then IMHO
Best regards, and Happy Thanksgiving to everyone.
Isopatch |
