Maybe oil actually does break out above $70.
I had been thinking that oil would have to stay below $70, because Saudi Arabia has, of late, released reserves when we got this level, putting a lid on the commodity.
Now, I am not so sure. That's because something is changing -- the likes of which I never thought possible: The big producers in the Permian basin aren't doing what they have historically done when oil got to these lofty prices. They have, historically, decided to drill as much as they could to take advantage of the higher prices.
It's not happening this time. One by one we are hearing about discipline from the patch with Friday's shocking announcement by Diamondback Energy (FANG) that it will initiate a $2 buyback and accelerate it to this fourth quarter. This news is jaw dropping. It's the company I least expect to return capital to shareholders. When I saw this news on top of the religion being showed by Devon (DVN) and Pioneer (PXD) , I realized that the U.S. will no longer play the swing roll that knocks pricing down with production. These companies all have clean balance sheets and have the ability to fund huge growth with their profits and they are choosing, instead, to give the money to you. It's a radical change that may leave us with production shortfalls that I hadn't counted on when I made my forecast that oil would be range-bound.
No, I am not as bullish on oil, as I am on natural gas after our reports last week about the prospects of $6-$7 this winter, double of what was expected not long ago, because of storm disruption and stepped up export given our low prices and the sky-high prices in Asia in Europe. We are blessed with such abundant supplies that our liquefied natural gas companies, the ones that export, can make fortunes taking our natural gas overseas. We also have a huge problem with a lack of pipeline capacity from the gigantic Marcellus formation in Pennsylvania to the Northeast, because voters have been able to block construction.
Now, though, it is oil that is front and center.
It's not just a discipline to return capital. It is also a commitment to be less carbon intensive because of demands from shareholders that there be less environmental destruction from companies that have, historically, not been responsive to such issues.
We got a good example last week when Chevron (CVX) boosted its energy transition plan to $10 billion up from $3 billion. Some criticized this plan as green-washing. They are dead wrong. How wrong? JP Morgan downgraded the company's stock, because it was spending too much money on the energy transition plan, saying that the breakeven for Chevron has had to move up to a point where it isn't as attractive as others. Why would the broker downgrade if it weren't meaningful? Still, what matters, again is that Chevron, which has the best dividend record of all of the majors, is spending less on drilling than it might otherwise.
Of course, none of this would matter if it weren't for the Saudis taking Aramco public. Now that it trades, the company has tried to be as attractive as possible including offering $75 billion in dividends. That's staggering and it comes at a cost of reduced exploration and production.
All of these changes are new and didn't exist during the last upturn. Plus Mexico and Venezuela continue to see production declines, declines that aren't being made up by production from Iraq or Iran.
Altogether, while the futures curve indicates that oil will come down in the next five years, it is easy to see oil breaking out, if the economy here and in Europe stays strong, even if the Chinese economy shows slowing.
In the old days, the idea that every spare dollar plus borrowings was gospel.
Now it's the opposite. So don't be surprised if the rally continues for both oil and natural gas.
