Doha meetings: What we learned
When the Doha meetings broke this weekend, Saudi Arabia would not agree to a freeze on oil production because Iran would not participate and vowed to sell as much as they could at any opportunity. This has basically been their stance for the past few years to try and curtail the high cost producers and maintain their global market share. There was almost no scenario where Iran would limit rebuilding their oil output after five years of international sanctions—yet somehow the market wanted to believe it. To be sure, with Russia at the table, there was some reason for hope.
This probably means that the recent highs near US$43 is about all we see until later in the year at the earliest – unless we see demand increase considerably. This means strong economic growth, or, more importantly and more likely, supplies keep falling in North America at a faster rate than it is increasing in OPEC. For that to happen, prices probably need to stay closer to US$30 than $40 and an increasing number of bankruptcies in the marginal producers in the fracking sector play out. The next scheduled meeting for such a “freeze agreement” could be in October, according to OPEC. So back to supply and demand fundamentals.
One has to wonder why the Saudis do not want oil prices to move higher. Last year they borrowed over $25B to pay for essential services in their economy and $100B of foreign reserves to keep the peg in the Riyal stable versus the dollar as every other floating petro currency got obliterated like the C$ as oil prices have declined. Perhaps they know that long-term demand is falling far quicker than they or anyone ever imagined it would even five years ago. Alternatives and a desire for the world overall to reduce fossil fuel emissions is moving quickly. To ignore this new reality would be somewhat naïve. This does not mean we cannot or should not invest in the energy sector, but the growth for the next few decades will likely come from cleaner energy versus carbon based demand.
So I started to do my homework and ask why on Sunday as the news broke; I went back to look at OPEC’s world outlook forecasts for the past few years.
On Saturday, the quarterly GDP in China came in at 4.5 per cent. The world is slowing and we expect demand for crude will continue to rise at a decreasing rate in emerging markets. And in developed markets, the push for better fuel standards and technology will likely curtail demand faster than expected to.
Back in 2010, they expected U.S. supply five years out to be 11.8mb/d and for OECD supply to begin to fall.
Medium-term oil supply outlook in the Reference Case mb/d
US & Canada 11.3 11.8
Mexico 3.0 2.7
Western Europe 4.7 4.1
OECD Pacific 0.6 0.7
OECD 19.6 19.2
Last year’s report for 2015 shows what 2014 actually was and expectations are for the coming decades.
2014 2020 2030
U.S. & Canada 17.3 19.8 20.4
of which: tight crude 4.0 5.2 5.2
OECD 24.2 26.3 26.5
Going forward, it is more of a demand story: The U.S. Energy Information Administration’s (EIA) most recent forecast does not have supply and demand coming back into balance until the seconf half of 2017. Last year, the expectation was for balance at the end of 2016. So not unlike the FOMC regarding tightening interest rates—even the guys who should know, don’t know. For now, expect lower for longer.
The energy sector has had a good rally off the recent lows and a few months/quarters of consolidation is likely. What then does mean technically? Here are some guidelines to consider:
We expect about 50 per cent to 61.8 per cent of the recent rally to consolidate over the next few quarters. See some of the benchmark ETFs to watch in the attached video.
Come out to one of the last few days of my roadshow so you can better understand how lower for longer in energy and interest rates could impact your retirement. I’ll give you some thoughtful guidelines for how to thrive in the next market cycle.
Watch the segment on BNN: http://www.bnn.ca/…/Larry-Berman-What-happens-to-crude-oil-…
Register for the roadshow at: www.bermaneducation.com