This is the moment we've been waiting for -- for the past year and a half, trying to figure out the timing of oil prices so that we can figure out the timing for oil stocks, and position ourselves for the coming renaissance.
On the horizon, on April 18, is the last OPEC meeting that will matter for us, in that it is the last OPEC meeting likely to bias oil prices lower.
What makes me say this? First, it is the expectation we have of failure that's been demonstrated to us by the two previous OPEC meetings in Vienna; the first near Thanksgiving in 2014 and the second in December 2015. Both held slim but real hopes for an agreement on production limits, and both managed to disappoint the markets with nothing. In the end, both also resulted in an oil market that slipped precipitously after the meeting -- the first time under $80 a barrel and the second toward lows under $30 a barrel.
This meeting is also infected with the hope of a production "freeze," courtesy of the Russians and Saudis, who claim not to need the agreement of the Iranians in order to help boost prices. One thing they are right about, they won't get any help from the Iranians. Indeed, Iranian production has increased 100,000 barrels a day in the last month alone, and the Iranian oil minister is hoping to see that number increase by a million barrels a day by this time next year.
But let's take this one at a time. First, the April meeting, where the toothless promises of the Russians and Saudis will probably be easily met: After all, they are both near their limits on production now, particularly the Russians, who are more apt to tax away any remaining capital the state-run behemoths of Lukoil, Gazprom and Rosneft have before any of them are able to apply that cash to more production. That's how dire the Russian economy is. Even dependent upon oil revenues to float budgets, they've indicated they'll be massively taxing the oil companies to keep them all afloat, destroying their ability to replace production now online.
None of this will stop the feeling of ineptitude from OPEC both entering and leaving the meeting in Qatar, and the futures are already predicting the price slide that will emerge from it: Hedge funds increased their short positions in futures by 38 million barrels in the last two weeks while decreasing long positions by 18%.
So while prices might weaken in the next week in anticipation of the meeting, I'm here to say this will likely be the last move down that oil may make for the next several years. Oil production in the U.S. has not only been rolling over, but accelerating to the downside; The Wall Street Journal reports that only 75% of 2015 production has been replaced; Iranians will find it nearly impossible to find the capex to increase production to the degree they might want; Brazil and the state-owned Petrobras (PBR) are so deep in a corruption scandal that they might as well put all their offshore hopes on hold for the next year. Oil lease auctions in the Gulf of Mexico were the worst ever.
I could go on and on. While I cannot predict how long it will take before the markets realize and react to the coming global production shortage I see as inevitable, particularly with the enormous global oil gluts that remain, I do think this moment is critical: Oil stocks that look cheap are cheap, and likely as close to as cheap as you're going to see them, perhaps for years.
Some names? No problem: In majors, Exxon-Mobil (XOM) and Total (TOT). Independents: EOG Resources (EOG), Cimarex (XEC), Hess (HES), Continental Resources (CLR). In services, you'll likely be just a little early with Baker-Hughes (BHI), now ready to receive its $3.5 billion breakup fee for the missed Halliburton (HAL) merger. Still far too early to speculate in who survives and prospers in offshore.
If you haven't begun to establish your long-term oil portfolio, now's the time.