I'm working on a new mini-book -- "5 things you must know about oil.....but don't."
Here's a small preview of one of the "5 things" that's apropos right now, with nothing but negativity and flat long-term outlooks for oil.
There's No Such Thing as a "New Normal" for Oil
Several investment bank oil analysts are preparing for an oil market that's going to stay flat for years to come. Even several oil CEOs -- most recently Ben Van Beurden of Royal Dutch Shell (RDS.B) -- have intimated that they are preparing for oil to "stay low forever."
This is hardly the first time I've heard the "new normal" argument for oil. Every few years, this debate comes to the fore -- like clockwork. In equal measure, the case is made for an oil market that either can't ever go up again, or one that won't ever again come down. I've been roaming around the oil markets since 1982, and in my 35 years, I've seen about three or four of each.
Before 2014, the entire global energy market was convinced that oil could never again get below $100 a barrel, never mind $50. It was the blindness to the constant and consistent cycling of oil prices that helped crater oil prices this time around, with undisciplined expansion of production worldwide, not just in U.S. shale oil.
Now we are at a stage of extended overproduction and gluts, causing a universal pessimism surrounding oil prices that almost no one believes could again lead to the exact kind of spike in prices that the cycle of overproduction, bankruptcy, consolidation and shortage has caused every other time in the past.
This isn't a case of a one-time forgetting of history, this is a case of "we've seen this, over and over again, and cannot help but forget EVERY TIME" how it ultimately turns out.
Admittedly, we've seen a slower turnaround in the boom/bust/boom cycle than most analysts, including me, planned on and expected. But it's hard to blame the analysts (and me). There's been a unique dysfunction in the current oil world that would has been difficult to predict.
During this meltdown in oil prices, normal business practice would have oil companies cutting costs and cutting production, losing as little money as possible and waiting for a rebound. Smaller oil companies, who didn't have the capital to survive through a long period of weakened prices would be forced stop production, and either be restructured or completely liquidated.
Neither of these has happened. Why?
Larger oil companies with cash on hand, or other capital access, have cut expenses -- but continued to produce the same or even more oil at small or even negative margins. Consequently, they've seen their cash melt away and their capital positions get consistently worse as their profits have collapsed. Even worse, they've continued to add to the glut, helping to perpetuate their own misery. Smaller oil companies have been even more incredibly able to refinance bad debt into even worse debt, find public money for further share dilution or find private equity money to invest in joint ventures or other partnerships.
In short, there's been an almost unlimited supply of good money prepared to chase a mountain of bad money in marginal oil producers. Like the bigger boys, they've stayed alive and have also barely cut production, adding further to the gluts.
The funny part of all this? Most oil CEOs will claim that these strategies have been a huge success. For them, I suppose they have, as they've been able to keep their companies alive and keep their own paychecks and bonuses coming in.
For us as investors, however, we've been stuck with a much longer bear market cycle -- and an industry that is now convinced that the long cycle is in fact a "new normal."
I'll explain why in part two -- my next column. But meantime, remember this: There is no "new normal" in oil.
Just the same old cycle, which has played out over and over again.
I'm planning to provide my new mini-book -- "5 things you must know about oil.....but don't" -- as a free giveaway to promote my weekly blog letter and Energy Word webinar service. (Both can be explored at my website, dandicker.com)