There’s a term in behavioral finance referred to as anchoring. One of the aspects of anchoring is that investors will attach more value to recent prices then past prices. We have recently witnessed this with oil stocks and oil prices in general.
If you’re currently in this camp, consider the following. Oil has set multi-month lows with recent Brent prices below $50 and US Crude below $45. Due to strong refining margins, refiners continue to process at high rates recently overshooting targets by over 300,000 barrels.
“If they continue to run at these levels, then we will see massive builds in distillates and gasoline stocks when the peak demand season is over for gasoline,” Saxo Bank senior commodity strategist Ole Hansen said.
Although many rigs have been brought offline – those have typically been new rigs. That does nothing to decrease current production rates. Additionally small oil producers have to continue to produce at high enough rates to continue to service their high debt levels.
Goldman Sachs analysts recently had the following to say – “These differences reflect not only a further deterioration in fundamentals, but also the financial markets decreasing confidence in a quick rebound in prices and a recognition that the rebalancing of supply and demand will likely prove to be far more difficult than what was previously priced into the market,” “As shale has dramatically reduced the time between when producers commit capital and when they get production from several years to several months, oil prices now need to remain lower for longer to keep capital sidelined and allow the rebalancing process to occur uninterrupted,”
At some point oil stocks will once again become attractive investments. Whether that’s one year or five years, no one really knows. At this point it appears, notwithstanding a terrorist attack on key oil reserves, that prices will remain depressed in the short-term.
However, when it turns, it could turn quick. Despite high levels of spending, exploration companies are simply finding fewer and fewer reserves of oil. US shale will begin to plateau and then begin to decline in the 2020’s according to IEA.
We’re keeping a very close eye on oil stocks as they were some of our best performers from 2005-2007.