Spring is here and Q1 is almost over. It’s been a mixed bag thus far for the sharehub top ten. The year started well with a peak gain of 9% on more positive tones regarding OPEC’s cuts and PoO. By the time Feb was upon us, the market was already growing impatient. I’m not quite sure why the market expected to see such a rapid reduction in builds when every cat and dog knows there was an armada of oil tankers floating off the US coast just waiting to flood the market with crude when the time suited. OPEC’s cuts were never going to bite into the glut with immediate effect. It was always going to take time. Today, we are just 3 months into the cuts with a high level of compliance. In Jan the markets mantra or fear was that OPEC compliance would be low and that any deal would fall through within weeks. The opposite has happened. The OPEC deal has thus far exceeded expectations. Something the market has decided to ignore. Instead, the focus has been on US data / inventory numbers. These numbers are unreliable and not a true indication of what is really happening in the oil market. One weeks data can be skewed by Vitol or Glencore or any trader that decides to dock a few tankers to flood the Hubs. Secondly the rig count which has been cited as a sign of Shale investment returning is running at well below half what it was when PoO was $100pb. In 2014 the Rig count was 1900. Today it is just 810. 1100 rigs are missing in action, piled up and gathering dust. When US production was hitting record highs, all these rigs were operational. This is the most relevant fact of all. US production is not going to be ‘replaced’ and note the word ‘replaced’ when half the rigs out there are stacked up unused. Yes, production can increase as current wells get run dry but where’s the next wave of production coming from? There are US shale projects currently running wells dry to maximise income and pay down debt. Some are being drained simply to satisfy the creditors. Once run dry, no investment is planned. And it’s issues like this that seem to be clouding the real picture. The market seems to think that US production is going to rise and rise and rise – it isn’t. It’s going to dry up and when it does dry up, new wells are going to be slow to come online. The US shale story is not the only issue or key point to focus on. Iran has added almost 1mbopd since sanctions have been lifted. Iraq is pumping at record levels. Countries like Nigeria and Libya are running at all time lows. Hence, it’s not all about the US. Libya and Nigeria will come back to normal levels in the future. That’s adding more oil to the market. US shale production will drop off as wells run dry. And I have no doubt that Cuts will continue into H2. But what happens when production wells begin to run dry on a global basis? Where is the replacement oil coming from. Many development projects due to come online in 2016 or 17 were halted and parked up in 2015. It’s going to take 18months minimum before these projects eventually come online.
In summary, we’ve seen a period of ‘oil tankers’ offloading oil from storage combined with increased production from Iraq and Iran. This has effectively reduced the impact of OPEC’s cuts. But what happens when Vitol and co run out of storage tankers to offload? What happens when US shale wells begin to run dry (and they do run dry fast)? The market could be setting itself up for a massive swing in supply / demand. It does not surprise one bit that OPEC and Russia plan to wait until May 2017 before agreeing any extensions to the cut deal. The situation is very ‘liquid’ (excuse the pun) and as each week passes, the dynamics are changing. They might not be visible in the data numbers just yet but they are are there. And when thenumbers begin to show US draws, just watch PoO fly.
Not long now – April could be the most telling month of all.
Sharehub hotlist results – Week 12 below:
All top pick lists treaded water last week and thesharehub picks still suffering from the recent 15% sell off in PoO. That said, Hummingbird Resources is a shining light and is clearly doing well from the near 15% rise in Gold this year. Last week saw a number of full year results being reported and Faroe Petroleum was a stand out example of a company making great progress against a very tough market backdrop. For a company that has 16kboepd production, zero debt and 100m in cash, it’s the bargain of the sector at present.