It's a great day to be long oil, as crude futures have smashed through $71/barrel in morning trading. In this Real Money column from April 12, I called oil at $70/barrel by Memorial Day. Coming on the heels of my prediction in RM that oil would hit $60/barrel by Thanksgiving, my friends who trade commodities are now calling me Nostradamus. OK, that's not actually true.
Obviously, President Trump's decision to exit the JCPOA with Iran has added near-term fuel to oil's fire, but don't make the mistake of thinking this jump is completely related to Iran. If there is one controlling figure I have used throughout my experience trading oil exploration and production stocks (E&Ps) it is the Energy Information Administration's measure of U.S. weekly crude stocks (excluding those held in the SPR.) Here's the link.
I look at that chart in two ways. First, on a macro level, inventories have been in a downtrend since the March 24, 2017 reading of 534.0 million barrels of oil. With this week's reading coming in at 433.8 million barrels, the inventory erosion works out to a very round figure of 100 million barrels. To state the obvious, that's a lot of oil. Since a barrel of oil equates to 42 gallons, that means the U.S has worked through 4.2 billion gallons of oil in under 14 months.
As with any commodity, one must look at numbers on an adjusted basis to account for seasonality. So, looking at the five-year average chart of the EIA data, we can see that oil is clearly now below its recent average levels for this time of year and is heading down toward the levels seen in 2012 and 2013 despite the fact that the U.S. economy has expanded since then. That is captured in the language in this week's EIA's status report: "U.S. crude oil inventories are in the lower half of the average range for this time of year."
One can never ignore geopolitics when analyzing oil stocks, though. In this case, the positive fundamentals in the U.S. are matched with a sharp decline in output from a producer right here in the Western Hemisphere. Venezuela's national oil producer, PDVSA, is in the throes of a very, very severe financial crisis, and it is the lack of incremental Venezuelan barrels hitting Gulf Coast refineries that is juicing U.S oil prices. Even under JCPOA the U.S was not importing any oil from Iran, so it is really Venezuela that has been the marginal drag on supply. I have been reading much this week about PDVSA's troubles with ConocoPhillips (COP) in the Caribbean, and I fear the death-spiral in the Bolivarian republic is nowhere near its completion.
So, all signals are flashing green for crude oil prices, and the stocks continue to look very attractive to me. I increased my firm's position in Gastar Exploration (GST) significantly this morning, as I am expecting a very positive management outlook on GST's Friday morning earnings call. Denbury Resources (DNR) shares continue to behave in parabolic fashion, and I'm certainly not selling any DNR here. either.
Looking at a long-term chart, though, I still don't think it is too late to initiate positions in smaller E&Ps such as Gastar, Denbury, Sanchez Energy (SN) and Evolution Petroleum (EPM) . The little guys were at the forefront of the Shale Revolution in 2013 and 2014 and the ones that have survived are perfectly positioned to benefit from higher crude prices in 2018.