Jeff Kilburg, KKM Financial, told CNBC that he is still bullish on crude oil despite the “noise” that there is more pain ahead. Anthony Grisanti, GRZ Energy, disagrees with Jeff Kilburg’s view. (Please click link below to watch video)
I understand that people shall have the right to have their own opinion. However, it has to be opinion, not perception that is based on it-is-what-is-going-to-happen-because-I-happened-to like-bullish-approach.
For some reason, Jeff Kiburg didn’t seem to realize that the “noise” he was talking about was actually the sound produced by him expressing his perception. He also needs to learn that, besides words “bearish” and “bullish”, English language also has such word as “responsibility”.
I would think that many people watched this interview and, possibly, decided to follow Kiburg’s view. I would also think that those who did follow that view are likely to lose their investments soon.
There is no change in fundamentals to suggest that oil will recover soon. Petroleum industry does not exist in isolation. It is influenced by a number of very important factors which are taking place as we speak.
Crude oil demand directly related to the growth of global economy. Additional volumes of oil production or cuts thereof do not result in significant change unless it occurs in combination with other important factors.
It is not clear why “experts” like KKM Financials refuse to see one critical detail. The downturn that we are witnessing today is unlike anything we have experienced before. Since it is something new, it signals that our previous ways of doing business might not be relevant anymore.
To substantiate my view I would like to highlight the following information.
Morgan Stanley indicates that following the global financial crisis in 2008, the Central Banks’ strategy of facing economic weakness through more debt has reached extreme measures through quantitative easing (QE) and negative interest rates. Although the policy has restored some economic growth, brought down unemployment in most countries and supported equity markets, arguably it has done very little to stimulate long-term productivity.
In the current scenario of low economic growth and income inequality, unconventional monetary policies have fuelled the rise of populist parties across the western world. If governments want to deliver more sustainable long-term growth, they need to change their approach. The prevailing opinion is that they are now more inclined to boost economic growth through expansionary fiscal policies, potentially driving government debt even higher.
In Morgan Stanley’s opinion, while this strategy may bring a short-term boost to economic growth, it is unlikely to generate sustainable productivity growth in the long-term. Hence, we believe that once the initial euphoria fades, economies may end up reverting to their long-term low growth rate with a higher debt level courtesy of an expansionary fiscal deficit.
Credit Swiss explains that in 2015 signaled a slowdown in Global IP, and then Chinese equity markets went limit down on the first day of 2016. The resultant collapse in global risk appetite into Panic territory took down all risky asset classes, and energy was no exception.
Credit Swiss highlights that although a lot of the headwinds faced by the global economy over the past four years are now sharply diminishing, the following risks remain in place: fiscal policy, which had taken 6.4% off GDP since 2011 in the US, and is now being eased; bank de-leveraging, which is now slowing; oil-related opex and capex (which had taken c.2% off US GDP growth in the past two years) should no longer be a drag, with the Baker Hughes rig count now rising; GEM growth outside of China is improving as spare capacity is re-established, while PMI’s in the commodity exporters such as Russia and Brazil are now moving higher; and US inventories, which were a drag on US growth for five quarters, are now set to add to growth. Meanwhile, euro-area GDP growth looks set to surprise, and the euro-area economy is 75% of the size of the US (on a PPP basis).
ValueScope couldn’t be more precise by indicating that futures markets aren’t a crystal ball, their price levels, and related options are useful for estimating future ranges or “confidence intervals” for crude oil and natural gas prices.
The graphic below shows the crude oil price on January 17, 2017, and predicted crude oil prices based on options on oil futures contracts (ticker /CL). The blue lines are within one standard deviation (σ) of the settlement price (green line) and the red lines are within two standard deviations for each month (for a refresher on standard deviations, see the January 2016 blog).
Based on the January 17, 2017 prices, the markets indicate that in mid-March 2017, there is about a 68% chance that oil prices will be between $48 and $60 per barrel. Likewise, there is about a 95% chance that prices will be between $40.50 and $67. For a longer-term view, by mid-December 2017, the +/- 1σ price range is $40 to $70 per barrel, with an expected value of $56.31.
Considering all of the above, I would pick the conservative position. Although 95% chance that oil would be in the range of $40.5 – $67, investors shall resist a temptation make their investment decision based on $67/bbl because $67/bbl is the maximum and, therefore, is unlikely to materialize. The global demand is projected to decline continuously for a period of 2017 – 2018. Besides all political and economic risks mentioned above, it is also necessary to keep in mind that oil and gas companies’ debt is growing faster than their cash flow. With rates hike on the horizon and low oil price, it is a concern whether oil companies would be able to meet their debt obligations if nothing is done to push prices up.
In addition, technological progress rapidly improved and continues to improve cost efficiency for renewables. It is expected that in the next decade, renewables would represent a substantial share of the total energy mix. Needless to say that it would reduce demand for crude oil.
If investment decision of many people would depend on my opinion, my advice would be for them to remain conservative until we can observe improvement in fundamental factors. Besides business fundamentals, my advice would also be in line with a very specific law – moral standards that help us to maintain our human nature intact. How can I forget that real people and their future are behind impressive numbers shown in the chart or eventually in my bank account.
I would choose this strange specific low for two reasons:
- So far, my entire working life is based on it. Therefore, it is too late to change my approach. It also allows me to like what I see in the mirror. Besides, as I always say to my children and other people, I know that when my time comes, Versace, Armani, D&G, Ralph Lauren, etc., will stay here because check-in luggage is not allowed.
- Unlike money and other material wealth which are subject to inflation, this law is the only legislation which has not changed throughout millenniums. Moreover, in today’s world, it is as vital as ever.
The other question is why Jeff Kilburg considers OPEC decision to extend the agreement on production cuts as something which may improve the price of oil? He supposed to know that OPEC does not have that level of influence anymore.
Due to significant cost reduction, the U.S. producers become more resilient. Besides, a huge number of DUCs and the specific nature of operations related to the development of unconventional oil and gas reserves provide U.S. shale producers with greater flexibility to react on any sign of oil price increase. To continue assuming that OPEC’s agreement may change anything (if there is no sign that fundamentals show a positive trend) is not only unreasonable but also irresponsible.
Specific note for those people who are quick to label my opinion as immature or wrong: Dear strange people, you are not legally obliged nor morally responsible to be in agreement with me. You are also free to express you views which might be in opposition to mine. However, before you express it, in any form whatsoever, please refer to events that took place during a period of 2014-2016. Failure to learn from the history causes loss of ability to analyze. As a result, expressed thoughts will not be qualified as an opinion and automatically granted the status of “perception”. But ‘perception” shall not and will never be allowed to stand next to my opinion. Sorry. Call me old fashion 🙂