Oil Stocks Are Behaving Like Dogs

 | Apr 24, 2017 | 2:00 PM EDT
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It's tough when you're covering one sector of the stock market, like I am. When that sector is behaving badly, you've really got nothing to be excited about, and even less to write about. But the truth is clear:

Oil stocks are behaving like dogs.

In the last several columns, I've tried to put this horrible action into perspective: Global oil markets are definitely on the slow, but steady, road to rebalancing. Oil analysts (like me) have been overly aggressive in picking winners that will come out of the oil bust -- and most of the excitement in oil is being forecast further and further into the future. I've counseled patience in waiting for these trends to turn, while watching oil stocks lag the general stock market indexes -- and in many cases, just sag outright.

What's going on?

What has not happened is what I predicted when I wrote my book, "Shale Boom, Shale Bust: the Myth of Saudi America," in 2015. We have not had the large-scale liquidation of debt-ridden mid- and large-cap oil producers either here in the U.S.  - or, less importantly, in Canada. What has also not happened is an aggressive combined effort from OPEC members to really curb production.

Huge increases in production before the November deal will now require several extra quarters to get global stockpiles cut back into what look like average years. Iran and Iraq were, for the most part, exempted -- and will likely not contribute again if production cuts are extended in June. Russia has delivered little more than lip service to its own promises to help in curbing production.

Here in the U.S., rig counts continue to increase as production again nudged over the 9.2 million barrel a day mark. All this has contributed to putting a cap on oil -- where even the small over-enthusiasm of hedge funds getting long have caused mini-busts in price, as we saw in mid-March and again just this last week.

So, what's supposed to happen?

I'm beginning to believe that what's supposed to happen is precisely what I expected when I published my book: a real trend of liquidation bankruptcy that removes production in the U.S. and Canada. Instead of seeing that, we've been left watching every oil producer fight for market share in a continuing long period of slack demand. Further, domestic producers are still trying to protect share value and investor dividends by increasing production, even while oil prices stay cheap.

The combined effect of this is that the inevitable timeline for the rebalancing of supply and demand continues to be extended -- first from my initial expectation of right about now in the Spring of 2017, to past the fourth quarter of this year, and perhaps into the middle of 2018.

Another unintended result is that oil prices remain stuck between $45 and $55 a barrel -- truly a level that does the worst damage possible to the industry: Too high to cause a panicked wave of restructurings and decreased production, and too low to deliver more than marginal profits (and delivering those to only the very few).

As the market stands now, conditions will get better for the industry -- at best -- at a snail's pace. The true boom cycle I envisioned for oil can only really take place after the catastrophic bust cycle that, so far, has not really taken place as yet.

And oil stocks, with their horrible action, have been reflecting this dilemma.

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