{"id":88117,"date":"2016-04-14T07:25:30","date_gmt":"2016-04-14T11:25:30","guid":{"rendered":"http:\/\/countingpips.com\/?p=88117"},"modified":"2016-04-14T07:25:30","modified_gmt":"2016-04-14T11:25:30","slug":"an-excess-in-energy-the-view-from-the-top","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/04\/an-excess-in-energy-the-view-from-the-top\/","title":{"rendered":"An Excess in Energy \u2013 The View From the Top"},"content":{"rendered":"
April 14, 2016<\/div>
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By WallStreetDaily.com<\/u><\/a> \"An<\/p>\n

On April 7, I attended The New York Hedge Fund Roundtable:<\/a> Opportunities and Risks in Today\u2019s Energy Markets.<\/p>\n

There, the experts of the energy industry came together for a panel discussion to address the current state of the energy markets, the opportunities and risks of this volatile sector<\/a>, and predictions on its future.<\/p>\n

The panel was moderated by Greg Zuckerman, Special Writer for The Wall Street Journal<\/em><\/a> and author of The Frackers<\/em>.<\/p>\n

Other panelists, all of whom are figureheads in the energy sector, specifically with respect to the financial markets, included: Chris Carter, Managing Partner of Natural Gas Partners<\/a>; Stewart Glickman, Energy Equity Analyst of S&P Capital IQ<\/a>; Rob Santangelo, Managing Director of Credit Suisse<\/a>; and Stephen Schork, Editor of The Schork Report<\/a>.<\/p>\n

Current State of Affairs<\/h2>\n

With a focus on the current market, attitudes were mixed and, overall, sanguine. This made for a truly interesting discussion.<\/p>

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Each panelist expressed their own agenda:<\/p>\n

Santangelo pointed out that while raising capital for upstream businesses is, currently, at the highest rate on record, the focus is now shifting towards recapitalizing companies.<\/p>\n

Carter, on the other hand, emphasized that energy businesses have to deal with the practical realities and obvious challenges of cutting costs and improving efficiencies.<\/p>\n

Additionally, Glickman reminded us of the recent decision made by Saudi Arabia, along with Russia and Venezuela, to freeze output at January levels, which dashed hopes of a cut in production. As a result, he stated, \u201cClients are questioning the stability, or lack thereof, in dividends.\u201d He also emphasized that investors are getting reallocated to energy volatility after a lull in the market from 2011 through 2013.<\/p>\n

And finally, an undeniably bearish Schork revealed that there has been a tremendous drop in the amount of investors\u2019 interest in energy since 2014, particularly among banking clients.\u00a0 Now, he states, \u201c[exploration and production companies (E&Ps)] are hoping for the opportunity to hedge and blood is still running in the streets.\u201d<\/p>\n

Oil in Excess<\/h2>\n

One issue, however, where there was unanimity, was that the world is undoubtedly awash in supply. Without a reduction in both the growth of supply as well as market turnaround, there is a major issue with over production.<\/p>\n

Carter raised an important supply side issue: Once Iran, Iraq, Libya, and Nigeria came back on line (after disruptions), their combined output doubled, rising from five million barrels per day (bpd) to 10.<\/p>\n

This was nearly the equivalent of adding another Iraq to the supply glut. In fact, a few days later, Iraq announced that it\u2019s producing at a record level of 4.55 million (bpd), only further exacerbating this surplus problem.<\/p>\n

Another reason for the glut, according to Glickman, is that when crude was in a backwardation, \u201call focus was on growth and not efficiency.\u201d He noted that, while everyone is looking for that inflection point, the coming years are not the time to catch the bottom.<\/p>\n

On a more sardonic note, Schork defined the state of the energy markets as \u201ccapital ill-discipline,\u201d because of three myths:<\/p>\n

    \n
  1. The first myth, according to Schork, is that Saudi Arabia is trying to disrupt the U.S. oil markets. Not only are they not<\/em> trying to do this, he explains, they are incapable of doing so.<\/li>\n
  2. The second is that the Saudis will lower output. Schork says, \u201cDon\u2019t believe it.\u201d Because the Saudis operate under \u201cTaqiyya,\u201d a juridical term referring to when a Muslim is allowed to lie under\u00a0law, they cannot be blindly trusted regarding their output.<\/li>\n
  3. And the third myth is that commodity prices drive the economy. Schork states this is false, plain and simple. He explains that \u201clow commodity prices are bad for the economy\u2026 the two most important issues are the Sunni-Shia split and the lousy economy.\u201d<\/li>\n<\/ol>\n

    The upside, according to Santangelo, is that crude demand is steady and will continue to grow.\u00a0 Meanwhile, supply is dropping, mostly from the United States. Carter points out that the U.S. is now the swing producer.<\/p>\n

    In fact, in the summer of 2015, the U.S. was producing close to 9.7 million bpd, and is now at 9 million bpd as of April 1.<\/p>\n

    \"Weekly<\/p>\n

    The problem, as Glickman points out, is that oil is an inelastic commodity, and there isn\u2019t enough flexibility to drive prices up. In fact, he points out, we are in the first supply-driven crisis in 30 years.<\/p>\n

    Adding to this problematic scenario is the substitution factor. Schork reminds us that, while gas guzzlers like the Hummer or Escalade were once status symbols, they\u2019re antiquated.<\/p>\n

    Now, the Tesla and other fuel-efficient hybrid vehicles are more popular signs of class, which is changing the demand dynamic. As driverless technology becomes less a thing of the future, the energy industry will only continue to see a major evolution of their necessity.<\/p>\n

    Moving Forward<\/h2>\n

    As Carter noted, all eyes will be on the April 17 meeting of OPEC and non-OPEC producers in the Qatari capital of Doha, to discuss the output freeze.<\/p>\n

    To date, 15 OPEC and non-OPEC producers, accounting for about 73% of global oil output, are confirmed to be supporting this initiative. Even so, the \u201cagreement\u201d lacks any compliance or regulatory surveillance.<\/p>\n

    Until then, however, Zuckerman sought some positive comments by asking the panel for bullish scenarios that could, even temporarily, boost the market.<\/p>\n

    Carter sees $35 to $40 per barrel oil as unsustainable, as most global producers don\u2019t profit at these levels. This means we should see tighter markets in 2016-17.<\/p>\n

    Furthermore, Glickman explained that, whereas 30 years ago decline rates were 4% to 5%, today they\u2019re 65% to 70%. This raised the question of, \u201cHow long are those who slammed on the [production] breaks going to stay on the sidelines?\u201d With 6,000 producers and 140 refiners in the U.S. alone, the market is fragmented and ripe for consolidation.<\/p>\n

    Zuckerman then questioned the recent rally in crude futures. He asked who was buying and whether or not it will prevent a shakeout.<\/p>\n

    Then, Schork expressed concern that bullish speculators haven\u2019t been present. In fact, \u201cthe last five to six week period was the biggest short covering ever. Producers are selling forwards while banks are kicking the can down the road.\u201d<\/p>\n

    Furthermore, he stated that \u201cthere is tremendous stupidity in the markets,\u201d and he questioned how many banks will be getting out of the business entirely.<\/p>\n

    Carter mentioned that the sector raised $10 billion in the first quarter, but only by 16 companies \u2013 therefore, only 10% have access to the capital markets and the other 90% don\u2019t.<\/p>\n

    While we saw 15 bankruptcies in 2015, this year, the number is more likely to come in at around 100.<\/p>\n

    Glickman noted that in the merger and acquisition (M&A) world, buyers are picking off assets rather than whole companies.<\/p>\n

    On the other hand, Santangelo believes that hedge funds, energy specialists, and households are still buying, with two-thirds of the bank\u2019s deals involving lending relationships.<\/p>\n

    Taking Advantage of the Glut<\/h2>\n

    The panel agreed that the future of the energy industry is all about disruptive businesses, citing important factors such as the rising health risks from smog in China, as well as the changing statistics of vehicle ownership per capita, not to mention the types of vehicles that are seeing an influx in popularity.<\/p>\n

    Glickman stated that while the integrated E&Ps are talking about 2040 sustainability goals, reaching these goals will likely happen much sooner.<\/p>\n

    As explained by Schork, Royal Dutch Shell no longer wants to be considered an oil company, but rather a natural gas company.<\/p>\n

    He suggests going long natural gas names, master limited partnerships (MLPs) in the short term, and shorting oil entirely, in the belief that West Texas Intermediate (WTI) crude will be under $30 per barrel by the end of the year. Perhaps even less.<\/p>\n

    Glickman suggests focusing on emerging markets, which are the incremental drivers of growth.<\/p>\n

    But the bottom line remains: We still need to soak up that excess 1.8 million bpd.<\/p>\n

    Good investing,<\/p>\n

    Shelley Goldberg<\/p>\n

    The post An Excess in Energy \u2013 The View From the Top<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

     <\/p>\n","protected":false},"excerpt":{"rendered":"

    By WallStreetDaily.com On April 7, I attended The New York Hedge Fund Roundtable: Opportunities and Risks in Today\u2019s Energy Markets. There, the experts of the energy industry came together for a panel discussion to address the current state of the energy markets, the opportunities and risks of this volatile sector, and predictions on its future. […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-88117","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/88117","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=88117"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/88117\/revisions"}],"predecessor-version":[{"id":88131,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/88117\/revisions\/88131"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=88117"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=88117"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=88117"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}