If OPEC fails to organize a convincing accord in its meeting tomorrow, the resulting price drop of crude futures will be a great opportunity to enter long positions in Statoil (STO), British Petroleum (BP), and Transocean (RIG). If this occurs, energy investors should enter in SIZE.
We’re bullish crude oil over a 3 year horizon. What we’ve seen over our career is that fundamentals shift quickly and catch speculators by surprise. As recently as June 2014, in the shadow of possible airstrikes on Libya, my desk was considering buying Brent at $120/bbl to hedge our yet-to-be delivered LNG cargoes. Then over the next 6 months the crude world flipped. The Saudis decided to defend market share over revenue and turned on all of its spigots and undercut the competition’s prices with hopes (arguably unrealistic) of breaking the financing cycle of the US E&P companies.
Now we face another fork in the road. With significant budget fatigue among producer states, a global oversupply of 1 M bpd, and dwindling storage (especially as China fills its phase 2 SPR in February), OPEC members can balance the market by convincingly cutting a million barrels of daily production. Or they can do nothing, and considering the most recent language coming from the Iranian and Saudi delegates, it is highly likely that no substantial result will be reached. And then we expect the market to aggressively sell producers of marginal barrels (and oil service companies who supply them).
This should be considered an excellent opportunity to buy “distressed” assets — oil majors facing a short-run threat to their dividend. In the longer run, global demand unflinchingly continues its upward trajectory and, as Enterprise Products reminded us in their Q3 call, one-third of current crude production must be replaced by new capacity by 2020 due to natural production declines in wells. Even if the market is not balanced now, it will not take much to do so.