What do you guys think of this chart? I am not sure we can argue successfully about the weather.
f5.grp.yahoofs.com Ed_xMfmQXh0BHKoKQ-XFxt3ziBkyLpFFMWwA-0nZdbgQxBbYa22g/Oil%20Services.pdf
Right now from a macroeconomic perspective I am trying to understand a question that I will state after these facts:
1. Production is declining
2. Drilling increases this year were caused by independent producers
3. Integrated producers used to comprise 40% of the GOM production, today they are about 15% of that production.
4. Commodity prices are high enough to justify profitable drilling.
5. Day rates continue to increase in the GOM.
6. Inventory levels are full for gas, and on the lower end for oil, distillates, and heating oil.
7. A normal to colder-than-normal winter is expected.
8. Robry's baseline data has turned bullish for the first time in a long time.
9. Integrated oil companies appear to be making a lot of money with high commodity prices.
10. Cash flow from those companies is being spent to pay down debt, purchase properties for future development, and to increase LNG facilities.
11. LNG facilities will not be available for 5 years or so.
12. Those LNG facilities will require additional tankers to transport LNG. Since the distance is much greater that a trip from Africa to Europe across the Med. Sea, many more tankers will be needed to transport the same amount of gas per cycle since the transit time is much greater across the Atlantic. Who is building all of these ships today? No one that I have come across.
13. Asian demand for oil and gas is increasing very sharply, absorbing any excess production.
14. The dollar is weaker due to the widening trade deficit and the low interest rate policy at home. OPEC's purchasing power has diminished considerably due to this since oil and gas are dollar-denominated commodities. This alone is a great incentive to keep oil production tight and prices high, IMO. Gold has gone up as well for this reason, not to mention other commodities.
15. Wall Street is still forecasting $24 oil for next year, yet the strips show $28+ by Sept. '04. They are forecasting $3.50 gas for next year, yet the strips show $4.80+ by May '04. Who is right, the analyst or the market? A: the market as these guys are consistently wrong.
16. The economy is improving quickly, requiring more energy to run factories and vehicles.
Q: With falling production and drilling discipline, how long will it take for integrated oil companies to increase drilling activity to supplant falling production in a shrinking environment? Deep water drilling, where they are focused is difficult and a longer term solution.
IMO drilling will increase next year as folks reason they have to provide the market with more gas -- or someone else will do it for them.
Do these facts point to a falling market? I do not think so. In fact, coupled with a test of a bottom of a range, I think they signal a good buy signal, based on a sound rational strategy of trying to buy something that is out of favor just because index managers are chasing tech stocks. But IMO, this is where one can make a lot of money by picking up good companies at decent prices.
If activity begins to increase ratios are reduced since earnings projections are increased, followed by upgrades. You ought to buy cyclicals when they seem expensive at a bottom of a range, and sell them when they seem cheap and everyone is doing a high-five because they are making money and they are saying, "to the moon, Alice." Okay, maybe they won't say that, but you catch my drift.
Today I own stock and calls for Jan and April at the money or out of the money. Keeping my fingers crossed. If the December trend repeats itself, it should be a nice Christmas. |
