Yesterday, I noted that US frack oil producers were enjoying 30% discounts from US oil service companies in a temporary program to keep these companies operating and to enjoy short-lived profitability from carefully chosen tight wells.
$XOI and $OSX are the industry indexes most investors follow. Check the components.
Key stocks in the Oil&Gas Producers index
https://finance.yahoo.com/quote/%5EXOI/components
Key stocks in the Oiler Service Companies index
https://finance.yahoo.com/quote/%5EOSX/components
At 1:00pm ET this afternoon, the weekly drill rig data will be released.
http://anasdaq.econoday.com/byshoweventfull.asp?fid=477355&cust=Nasdaq&year=2017&lid=0&prev=/bymonth.asp#top
When you read the numbers, review the charts going back a few years before considering the many so-called experts who will tell you there is an explosive increase in US production that will overcome the production cutbacks from the rest of the world. Nonsense.
The charts will show the huge number of drill rigs that formerly operated in the US that did at the time produce many tight wells. The problem is that these short-lived wells must be replaced each year, and they are not because of low oil prices.
https://ycharts.com/indicators/reports/baker_hughes_rotary_rig_count
Ask yourself, if known deposits of frack oil are there to be drilled and the Oilers are making money, why is there not a thousand more drill rigs working? The answer is simple: higher oil prices are needed.
Look also at the drop in conventional wells drilled since the oil price collapsed.
https://ycharts.com/indicators/us_vertical_rotary_rigs
These graphs show the continuous increase in US economic growth.
https://fred.stlouisfed.org/series/GDP
https://tradingeconomics.com/united-states/gdp
A growing US economy needs more oil.
Ask yourself, as the US GDP continues to grow, how is the US oil industry meeting refinery feedstock demand?
The answer is twofold: (i) massive imports and (ii) huge drawdowns of reserves.
But, importing at this level is not bullish for the US Dollar and the drawdowns cannot continue forever.
Saudi Arabia owns the biggest oil refinery in the US. So, when the Saudi Oil Minister, who is the current head of OPEC, states flat out that global oil supply-demand will be rebalanced at higher prices by the end of the year, he knows exactly what he’s talking about.
He’s telling us to expect $75 Oil, which is a 50% increase from today’s level, which would have a serious impact on Oiler profitability and at the same time continue to support global stock market index levels for a while longer.
Unfortunately, too many of you fail to understand that the capital market is no longer a price discovery mechanism. Computer algorithms have hijacked it with the intent of taking your money, and they are winning. As the years go by, there are fewer and fewer of you.
This does not have to happen. Simply listen to industry experts and follow economic logic, then buy and sell only when these algorithms have pushed prices to extremes every few months.
Be patient. Stick with the program. It’s still all about Oil.
