Oil prices are off a quarter this morning, but investors should remember to maintain perspective on the crude realities of crude pricing. At a front-month contract price (this is the most widely quoted "price of oil") of $41.25 today, the petroleum industry seems to be in a rare state of balance. Note that analyzing a one-year chart is going to give a very misleading view of the real supply/demand balance in crude oil, because of that "slight hiccup" we saw around the third week of April. Oil prices then fell from a Covid-19-hampered level of $30/barrel in the beginning of April to nearly (-$40) per barrel on April 20th. Yes, crude markets react to manipulation like any other, and that was a squeeze of epic proportions that was caused by excessive flows into (USO) , USCF Investments' "benchmark" oil price ETF.
I spent so much time that week in April trying to explain the implosion in oil futures prices caused by USO's blow-up (the ETF subsequently did a 1-for-8 reverse split on April 28th, always a sign of strength) that I just can't muster the energy today to go into detail on what a Ponzi scheme that ETF is. Avoid USO like the plague.
But oil is still a liquid (literally,) globally-traded commodity, and it should never be ignored. As "woke " folks fail to see the hypocrisy in using Twitter -- which is simply the worst app ever invented and a cesspool of terrorism, hate speech and one-sided censorship -- to virtue-signal about climate change, there is still demand for oil in the world. In fact, OPEC's most recent Monthly Oil Market Report, released yesterday, forecasts global oil demand of 90.01 million barrels per day for 2020.
But the OPEC forecast was a lowering of its previous forecast, and this is where investors need to use their noggins. I often say that the key factor in investing is the second derivative, and OPEC's research shows that marginal demand for crude will decline. Global economies are not yet reopened and, as moves announced yesterday show states like New York and countries like Spain are going further into lockdown, not reversing them.
No one in his right mind would go on CNBC now and shout "ya gotta own oil stocks here." The reality is slightly more nuanced. Oil still costs more to consume than it does to produce, and so there is a profit that is gained by producers. Also, oil is typically consumed far from where it is produced, so there is value-added in transporting it.
The most recent report from China's General Administration of Customs showed oil imports there rose 2.1% sequentially in September to 11.8 million barrels per day. Whew! China is the incremental buyer for oil, and has shown very little skill in producing its own reserves, so the wheel is still turning
But to invest in these stocks you must assure yourself that you are GETTING PAID. Oil is NOT viewed as a growth industry anymore, and many fund managers avoid it for ESG reasons. It's not cool to be an energy investor now, so you better darn well be earning a real return on your capital from doing so.
Exxon (XOM) management knows that, and the Board's recent decision to maintain the quarterly dividend at $0.87 (payable December 10th to shareholders of record as of today) is further evidence that they get it. It is the only reason to own Exxon stock now. According to S&P's documentation, the S&P energy index has a currency annualized yield of 7.47%. That's nearly 4x the yield of S&P's other well-known index, the S&P 500.
As I have noted in prior RM columns, I am a long-term Exxon shareholder. The stock's currently indicated yield of 9.54% (which has fallen in recent days as Exxon has rallied on the Pfizer (PFE) /BioNTech (BNTX) vaccine data) allows me to retain what little is left of my sanity. And to post returns for my clients.
Further afield (or at sea) my firm still has its largest holding as DHT Holdings (DHT) . DHT now yields "only" 14.8% on an annualized basis as the company sets its quarterly dividend via a payout ratio target (60%.) Shareholder returns vary as DHT's earnings do. DHT's next dividend (payable November 25th to shareholders of record as of November 18th) will decline more than 50% from 2Q20's level as charter rates for its VLCC tankers have normalized from their covid peaks, but it still represents a 300% increase from 3Q19's payout, which is the most relevant comparison.
So, cash flow never lies and perspective is important. if you are brave enough to invest in energy-related stocks you had better ensure that YOUR cash flow is improving owing to those holdings.