Tom Kirkman

IEA Sees First Global Oil Demand Drop in a Decade on Coronavirus

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Regardless of however serious you may think the Coronavirus may or may not be, it *is* affecting oil prices seriously.

Significantly, the IEA is alarmed at the drop in demand, and OPEC+ seems helpless again.  Meanwhile, U.S. fracking continues unabated, continuing its balls to the wall overproduction, seriously shooting itself and the global oil industry in the foot yet again.  Yes, I'm annoyed.

 

https://www.msn.com/en-us/finance/markets/iea-sees-first-global-oil-demand-drop-in-a-decade-on-coronavirus/ar-BBZXcN7

(Bloomberg) -- Global oil demand will drop this quarter for the first time in over a decade as the coronavirus batters China’s economy, the International Energy Agency said.

The new estimates show that oil markets face a significant surplus despite the latest production cuts by OPEC and its partners. Crude already sank to a one-year low below $50 a barrel last week and the impact of the epidemic will be felt throughout the year, the agency said.

“Demand has been hit hard by the novel coronavirus and the widespread shutdown of China’s economy,” the Paris-based IEA said. “The crisis is ongoing and at this stage it is hard to be precise about the impact.”

World fuel consumption -- which had previously been expected to grow by 800,000 barrels a day during the three-month period, compared with a year earlier -- will instead contract by 435,000 a day, the IEA said in its monthly oil market report.

For 2020 as a whole, the virus will curb annual growth in global consumption by about 30% to 825,000 barrels a day, the lowest since 2011. The effects will be more significant than those of the 2003 SARS epidemic because of China’s increased importance and integration within the world economy.

The outbreak has shuttered businesses and prompted the quarantine of tens of millions of people in China, the world’s biggest crude importer. The country accounted for about 75% of last year’s oil-demand growth, according to the IEA, which advises most major economies.

U.S. crude futures have fallen 17% this year as traders assessed the impact of the epidemic. Consumers are unlikely to benefit from the drop in fuel prices because the disease will inflict damage on the wider economy, the IEA said.  

OPEC+ Cuts

The outbreak has prompted Saudi Arabia, the world’s largest oil exporter, to push its allies in the Organization of Petroleum Exporting Countries and beyond to consider an emergency meeting and further production cuts. However, Russia, the kingdom’s most important partner in managing supplies, has so far resisted the initiative.

Even though the group launched new supply curbs at the start of this year, the slump in demand threatens markets with a surplus of about 1.7 million barrels a day during the first quarter and 560,000 in the second. Last month, OPEC was already pumping the least crude since the financial crisis of 2009, according to the IEA.

The OPEC+ alliance had already faced an oversupply in the first half of 2020 because of the ongoing output surge from U.S. shale-oil drillers, the agency said. That industry is likely to remain resilient against the price slump until later in the year, it predicted.

Given the abundance of supply, disruptions in OPEC members such as Libya and Nigeria are having little impact on prices, the agency said.  ...

 

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What part of supply and demand does the Shale Industry not understand? They will literally drill themselves out of a job. This sector is very fishy and almost could become a conspiracy theory. Doesn’t make sense at all it literally suicide by fracking.

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Historically, the IEA has been unable to effectively forecast on which horizon the sun will come up on! If the corona virus gets sorted out, Chinese industry, and therefore their demand for oil, will recover quickly.

I’ll adopt a wait and see attitude. Where exactly does the IEA get their info they use for these predictions? Reading tea leaves, studying goat entrails, the famous magic 8 ball?

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57 minutes ago, James Regan said:

What part of supply and demand does the Shale Industry not understand? They will literally drill themselves out of a job. This sector is very fishy and almost could become a conspiracy theory. Doesn’t make sense at all it literally suicide by fracking.

That's exactly what's happening: over-leveraged shale drillers are lemmings on the run to drown in their own sea of oil. The regulatory agencies are actually making this worse by allowing unchecked venting and flaring--not to mention giving the "industry", uh, casino, a black eye. 

Venting is supposed to be only for <24 hours and flaring for <10 days. It's going on for months in some instances--by those who can't afford to reserve space in a pipeline. That merely postpones inevitable bankruptcies.

Sure, it removes some gas from the "system," but it also encourages ever-more-determined drilling by those companies, so more gas is produced . . . and vented and flared. And the beat goes on. 

Soon, this will come to its logical conclusion. 

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1 hour ago, Gerry Maddoux said:

That's exactly what's happening: over-leveraged shale drillers are lemmings on the run to drown in their own sea of oil. The regulatory agencies are actually making this worse by allowing unchecked venting and flaring--not to mention giving the "industry", uh, casino, a black eye. 

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(edited)

The United States implemented the Strategic Petroleum Reserve after getting battered by two oil shocks. I believe that Reserve serves a valid purpose and is a strategic asset to the US. I won't get into the specifics of its (mis)management since inception. The concept is sound. 

This is a good time for China to do the same. They need to build huge facilities that can store millions of tons of crude. This will solve two pressing issues for them. Number one as @0r0 has documented well and often, the Chinese are printing vast sums of money and creating "infrastructure" projects to keep their restless population busy. Rather than build another ghost city, they would be doing themselves and their population a service by utilizing those resources to accumulate a highly valuable resource for the future. 

This merry go round won't last forever, oil companies will go bankrupt and the purchases of their assets will burden the acquirer, meaning additional investment will be constrained. There will be another oil shock and it will be a disaster. 

Edited by Ward Smith
Damn auto-correct all to hell
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1 hour ago, Ward Smith said:

The United States implemented the Strategic Petroleum Reserve after getting battered by two oil shocks. I believe that Reserve serves a valid purpose and is a strategic asset to the US. I won't get into the specifics of its (mis)management since inception. The concept is sound. 

This is a good time for China to do the same. They need to build huge facilities that can store millions of tons of crude. This will solve two pressing issues for them. Number one as @0r0 has documented well and often, the Chinese are printing vast sums of money and creating "infrastructure" projects to keep their restless population busy. Rather than build another ghost city, they would be doing themselves and their population a service by utilizing those resources to accumulate a highly valuable resource for the future. 

This merry go round wrong last forever, oil companies will go bankrupt and the purchases of their assets will burden the acquirer, meaning additional investment will be constrained. There will be another oil shock and it will be a disaster. 

Well said!

President Trump recently went off about half-cocked and said he was going to sell our SPR off at $50 and pay for the border wall. I'm sure someone got to him and said that, a) the average cost per barrel of that reserve is $29.50, and b) it's illegal to sell, c) it would crater oil and bring about a recession or depression. He's a fast-learner.

China has the second-largest reserve. They're not likely to use it. I'm sure you're right: they're building more storage. After all, if we don't all have enough for a shooting war, there's nothing left but nuclear. 

We're one Black Swan event away from an oil shock. I think that will be Russia. Despite the cursed coronavirus, oil supply is much tighter than is being used as a trading fulcrum.

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4 hours ago, Tom Kirkman said:

EQqY0umWkAAXwbQ.jpeg

Very likely severely underestimating the temporary fall in demand. Whole sectors of the China economy are shut down. By necessity a proportional quantity of oil consumption is not happening. Some of the businesses that closed are not coming back AT ALL, as they are cutting bait now as they see no recovery in the time span they can survive the cash burn.  The car and air travel and truck transport that has not been happening is not going to be regained later in the quarter or the year. 

The only thing going for oil prices is that there is already a defacto cut of 1 MMBbl/d from the Libya shutdown and it appears that Saudi is not trying to resell cancelled orders onto the spot market. It is just a question of time till SE and N Asia and Gulf storage are full up. The intended quarantine period is 2-3 weeks. Where quarantine is not in effect, self quarantine continues as businesses are not opening and those that have are not getting even half the employees to show up. Flextronics is making face masks instead of iphones - perhaps its empty plant in Wisconsin will soon see activity.

Assuming that the quarantine and sterilization efforts throughout China result in identification and isolation of remaining cases (which I doubt as that would require 4-5 billion test kits that China would have a problem making - to account for the 50% or so false negatives) so that the economy can be restarted at full capacity, that will not include much leisure travel, nor any seated restaurants nor events and party business. Karaoke bars are shutting down permanently for e.g.. The drop in China consumption is about 6 MMBbl/d for 2-3 weeks which will continue with a 1-2 MMBbl/d for another few months so 120 Mob and 100 Mob for a total of 220 Mob, redistribute for the quarter and it is 2.4 MMBbl/d not 0.5.

So IEA will have up to date global storage estimates in a few weeks. It will not look pretty. 

 

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4 hours ago, Gerry Maddoux said:

Well said!

President Trump recently went off about half-cocked and said he was going to sell our SPR off at $50 and pay for the border wall. I'm sure someone got to him and said that, a) the average cost per barrel of that reserve is $29.50, and b) it's illegal to sell, c) it would crater oil and bring about a recession or depression. He's a fast-learner.

China has the second-largest reserve. They're not likely to use it. I'm sure you're right: they're building more storage. After all, if we don't all have enough for a shooting war, there's nothing left but nuclear. 

We're one Black Swan event away from an oil shock. I think that will be Russia. Despite the cursed coronavirus, oil supply is much tighter than is being used as a trading fulcrum.

Yes, there is a tightness in the market which will resume later in the year as we approach driving season and have depleted the oil stored due to China's quarantine. By then, the damage from less drilling will have been done and output should drop some unless the technology optimization has spread to the point of everyone using it effectively and we get 5-10% greater initial production volumes per well. If that had not been the case, we would not have sustained backwardation for months and only a few months worth of contango during the China quarantine.

The discussion above about shale frackers being off their rockers may not be as bad as it seems as it is precisely what they would be doing if they had this technology improvement at hand and were  actually hitting <$40 all in costs per barrel and $30 and change cash costs. Note that rig rates and crew rates are all lower during depressed drilling periods, so their costs, though unsustainable, may be in this range for now. 

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11 minutes ago, 0R0 said:

The discussion above about shale frackers being off their rockers may not be as bad as it seems

Oh, it's as bad as it seems, believe me. When the only checks and balances are bankruptcy and a horribly inept OPEC+ cutting production a few thousand barrels, the world has clearly turned turtle.

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1 hour ago, 0R0 said:

The car and air travel and truck transport that has not been happening is not going to be regained later in the quarter or the year. 

I can confirm that air travel is taking a massive hit in China and in Asia overall.  In cities across China, high percentages of airline fleets are parked and the crickets are chirping along merrily.  In fact, it is reported that Beijing has mandated airlines to "do whatever is necessary" (fly empty, at least once a day or week) to keep routes open between Chinese cities and international airports.  Across Asia, people are only travelling if absolutely necessary, whether that be for business or pleasure.  Reports are widespread that people are eating $1,000 tickets they had already purchased in advance rather than risk travel and infection.  Airlines face intense financial pressure where margins were never too good to begin with.  Tourist arrivals here in Thailand are reportedly down some 80% with hotels/beaches/resorts//buses/bars & restaurants virtually empty.  I believe businesses will be the first to start travelling again as soon as they can for obvious reasons, but even after the authorities start announcing it is safe again at some point in the future, how many people are just going to decide to put their trips off until next year?  It is hysteria, but it is what it is.

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22 hours ago, Douglas Buckland said:

Historically, the IEA has been unable to effectively forecast on which horizon the sun will come up on! If the corona virus gets sorted out, Chinese industry, and therefore their demand for oil, will recover quickly.

I’ll adopt a wait and see attitude. Where exactly does the IEA get their info they use for these predictions? Reading tea leaves, studying goat entrails, the famous magic 8 ball?

Douglas,

The future number of possible scenarios is literally infinite, any choice of a single scenario representing the future has a probability of being correct of 1/infinity=zero.  Requiring accurate predictions of the future by any agency is a ridiculous request based on very simple statistics that most high school students should understand.  :)

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(edited)

14 hours ago, 0R0 said:

Yes, there is a tightness in the market which will resume later in the year as we approach driving season and have depleted the oil stored due to China's quarantine. By then, the damage from less drilling will have been done and output should drop some unless the technology optimization has spread to the point of everyone using it effectively and we get 5-10% greater initial production volumes per well. If that had not been the case, we would not have sustained backwardation for months and only a few months worth of contango during the China quarantine.

The discussion above about shale frackers being off their rockers may not be as bad as it seems as it is precisely what they would be doing if they had this technology improvement at hand and were  actually hitting <$40 all in costs per barrel and $30 and change cash costs. Note that rig rates and crew rates are all lower during depressed drilling periods, so their costs, though unsustainable, may be in this range for now. 

0R0,

Not clear this "magic technology" will reduce costs as much as you believe, remember that investor presentations are often full of horse dooky, the fine print in every investor presentation essentially says to take all of the large print stuff with a pound of salt.  The 10-Q and 10-K SEC reports tell the real story on average costs.  More importantly look at the bottom line, or more importantly cash flow.  Pioneer burned 312 million in cash in first 9 months of 2019.  This was at average cost of oil sold of about $54/bo in 3rd quarter.  For Pioneer at least, it does not look like they are at an average cost of $40/bo for full cycle cost (the only cost that matters).

Edited by D Coyne
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4 hours ago, D Coyne said:

Not clear this "magic technology" will reduce costs as much as you believe, remember that investor presentations are often full of horse dooky, the fine print in every investor presentation essentially says to take all of the large print stuff with a pound of salt.

Just a second, Dennis. We're supposed to be skeptical of investor presentations, but not of your models? 

I'm not trying to insult you but in December you were quite adamant that "peak oil" was coming to the shale fields in 2025. Yesterday, you were up to 2028. Nothing has changed in two months but your models. Yet if someone were investing solely on the strength of your models, he or she would be in a quandary. 

In your modeling you have repeatedly referred to "tier 1" and choice drilling spots, yet the entire tier concept was debunked last year--both in the Permian and the Bakken. 

You're right: many of these investor presentations are full of hot air, but I would respectfully submit that modeling for peak oil when we're talking about 15 million acres in the shale, Guyana, and unexplored regions in Africa is akin to astrology. I must confess that some of your posts make me wonder if you're not mainly working for the solar and windmill people. Nothing wrong with that but it might be something you'd like to divulge for the sake of transparency.

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9 hours ago, D Coyne said:

0R0,

Not clear this "magic technology" will reduce costs as much as you believe, remember that investor presentations are often full of horse dooky, the fine print in every investor presentation essentially says to take all of the large print stuff with a pound of salt.  The 10-Q and 10-K SEC reports tell the real story on average costs.  More importantly look at the bottom line, or more importantly cash flow.  Pioneer burned 312 million in cash in first 9 months of 2019.  This was at average cost of oil sold of about $54/bo in 3rd quarter.  For Pioneer at least, it does not look like they are at an average cost of $40/bo for full cycle cost (the only cost that matters).

I have that analysis on my to do list, but the cash revenue has to be compared to the capital and expenditure the year before. Not on the same year basis. 

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(edited)

13 hours ago, 0R0 said:

I have that analysis on my to do list, but the cash revenue has to be compared to the capital and expenditure the year before. Not on the same year basis. 

Let us know what you find, On an ongoing basis, I doubt you will find a lot of tight oil producers that have fared well at $54/bo.

The nonsense that tight oil works at $40/bo is based on unrealistic well profiles (where the typical well profile presented is a well representing the top 10% of all wells drilled), or by excluding land costs, overhead costs and the like.  It is what I call investor presentation hype and should not be believed by a serious investor in the oil sector.

Edited by D Coyne
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(edited)

19 hours ago, Gerry Maddoux said:

Just a second, Dennis. We're supposed to be skeptical of investor presentations, but not of your models? 

I'm not trying to insult you but in December you were quite adamant that "peak oil" was coming to the shale fields in 2025. Yesterday, you were up to 2028. Nothing has changed in two months but your models. Yet if someone were investing solely on the strength of your models, he or she would be in a quandary. 

In your modeling you have repeatedly referred to "tier 1" and choice drilling spots, yet the entire tier concept was debunked last year--both in the Permian and the Bakken. 

You're right: many of these investor presentations are full of hot air, but I would respectfully submit that modeling for peak oil when we're talking about 15 million acres in the shale, Guyana, and unexplored regions in Africa is akin to astrology. I must confess that some of your posts make me wonder if you're not mainly working for the solar and windmill people. Nothing wrong with that but it might be something you'd like to divulge for the sake of transparency.

Gerry,

Believe what you will.  Perhaps you are confusing my US tight oil model with my Permian basin model. The model in Dec probably used an oil price model that gradually rose to $85/b by 2027 and then oil price remained at that level until 2040 and then gradually declined to $40/b by 2075.  The newer model used the EIA's AEO 2020 oil price scenario up to 2045, then it was assumed oil prices remain $93/b for two years and then started to gradually decline.

The change was minor for US tight oil from a peak in 2025 to a peak in 2026, both models had a peak for Permian basin in 2028, that was unchanged.

As to tier 1, I don't remember focusing on that, I have mentioned that there are core areas where most successful wells are drilled, there is plenty of data on this.  See link below for well profiles by county in the North Dakata Bakken for wells whicgh started producing from 2015 to 2019.

https://public.tableau.com/shared/M3Y7TNKFK?:toolbar=n&:display_count=n&:origin=viz_share_link&:embed=y

Actually both models peak for tight oil in 2026, I must have misspoke in December, because the model from December on my computer (with high wellhead price of about $85/bo vs $93/b for AEO reference oil price case) is very similar to my more recent scenario.  Note that I assume well cost does not decrease in 2019$, that LOE also remains fixed in real dollars per barrel.  I assume Permian new well EUR starts to decrease in Jan 2021 and for other major plays this begins in mid 2019.  EUR rate of decrease depends on number of wells completed and TRR assumptions matching mean USGS estimates.

Certainly it is possible that any of these assumptions might be incorrect (either too low or too high), also future oil prices are unknown.

The URR of my December scenario is 87 Gb and the more recent scenario (with higher oil prices) has a URR of 95 Gb, The EIA's AEO 2020 tight oil scenario has a URR of about 125 Gb for tight oil, in my opinion that scenario is not realistic as TRR is likely less than 115 Gb.

Second chart below shows both scenarios in kb/d on left axis, with oil price scenarios on right hand axis.

 

ND6423 (4).png

tight2002.png

Edited by D Coyne
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1 hour ago, D Coyne said:

Let us know what you find, On an ongoing basis, I doubt you will find a lot of tight oil producers that have fared well at $54/bo.

The nonsense that tight oil works at $40/bo is based on unrealistic well profiles (where the typical well profile presented is a well representing the top 10% of all wells drilled), or by excluding land costs, overhead costs and the like.  It is what I call investor presentation hype and should not be believed by a serious investor in the oil sector.

As an economic issue, my first focus is on cash costs. Cursory correlation shows over time that minimum base costs are roughly correlated to general inflation, while beyond that threshold, leases, rig rates, crew rates even materials etc. are proportional to the oil price. Which is why all the energy sector tends to act in tandem on the stock market. After an oil or gas price crash lease terms are redone, debt is restructured or turned into equity via negotiation or bankruptcy, so while significant for individual companies, and to equity or regular debt investor, it isn't to the economic functions. After the restructuring wave, the funding mechanisms resume and profitability becomes important again on a 10k basis. So I am primarily interested in the baseline cash costs and the proportion constant to the oil price. I have the baseline cash costs at a tad over ~$30. All in costs during a drilling slow down should be just over $40 as claimed at the moment by the better producers. 

When time allows I will go back to see what it looked like in 2015-16 when costs were low and compare to current cost levels.. 

That is probably not what you are after, but it is the kind of information that allows you to understand the price structure of the economy. Which interests me all the time, vs. Oil patch profitability which interests me only when looking to invest in the sector because of tightening supply vs. demand. Which was looking good just before the virus after having been quite bad for a long time as the FED, ECB etc. were tightening (especially QT) into a global deflationary wave and refusing to take the hint as they went through the global economy like a wrecking ball.  

 

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(edited)

On 2/13/2020 at 8:37 AM, James Regan said:

What part of supply and demand does the Shale Industry not understand? They will literally drill themselves out of a job. This sector is very fishy and almost could become a conspiracy theory. Doesn’t make sense at all it literally suicide by fracking.

Supply and demand don't cover their use it or lose it leases, nor pay the debt on schedule. While those who have the choice may not be drilling new holes or starting fracking on DUCs, they definitely are not going to stop what they are already in process of doing. 

Better some cash flow to none at all. 

Edited by 0R0
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4 hours ago, 0R0 said:

As an economic issue, my first focus is on cash costs. Cursory correlation shows over time that minimum base costs are roughly correlated to general inflation, while beyond that threshold, leases, rig rates, crew rates even materials etc. are proportional to the oil price. Which is why all the energy sector tends to act in tandem on the stock market. After an oil or gas price crash lease terms are redone, debt is restructured or turned into equity via negotiation or bankruptcy, so while significant for individual companies, and to equity or regular debt investor, it isn't to the economic functions. After the restructuring wave, the funding mechanisms resume and profitability becomes important again on a 10k basis. So I am primarily interested in the baseline cash costs and the proportion constant to the oil price. I have the baseline cash costs at a tad over ~$30. All in costs during a drilling slow down should be just over $40 as claimed at the moment by the better producers. 

When time allows I will go back to see what it looked like in 2015-16 when costs were low and compare to current cost levels.. 

That is probably not what you are after, but it is the kind of information that allows you to understand the price structure of the economy. Which interests me all the time, vs. Oil patch profitability which interests me only when looking to invest in the sector because of tightening supply vs. demand. Which was looking good just before the virus after having been quite bad for a long time as the FED, ECB etc. were tightening (especially QT) into a global deflationary wave and refusing to take the hint as they went through the global economy like a wrecking ball.  

 

0R0,

I consider capital allocation important in an economic analysis.  New investment will not likely occur if capital is destroyed by investing in the oil sector, generally people don't invest with the intention ro lose money, so far that is what the tight oil sector has looked like on the grand scale, it's where capital goes to die.  :)

Smart investors would not touch it with a ten foot pole at less than $75/bo.

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32 minutes ago, D Coyne said:

I consider capital allocation important in an economic analysis.  New investment will not likely occur if capital is destroyed by investing in the oil sector, generally people don't invest with the intention ro lose money, so far that is what the tight oil sector has looked like on the grand scale, it's where capital goes to die.  :)

Smart investors would not touch it with a ten foot pole at less than $75/bo.

So you don't consider Chevron, Exxon, Occidental, and Hess "smart investors?"

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3 hours ago, D Coyne said:

0R0,

I consider capital allocation important in an economic analysis.  New investment will not likely occur if capital is destroyed by investing in the oil sector, generally people don't invest with the intention ro lose money, so far that is what the tight oil sector has looked like on the grand scale, it's where capital goes to die.  :)

Smart investors would not touch it with a ten foot pole at less than $75/bo.

Investment returns in energy are always volatile, but did give you long trends. Our current trend is a discovery of new supply and the 2nd wave of investment in it. Not as successful for the investors since prices never reached expectations so neither  did returns. However, after the idiotic tightening attempt by central banks that did most to sabotage the oil rally, we have a wave of stimulus to credit and liquidity that will bring up demand. We would have been smack in the middle of it if the Wuhan Coronavirus was not shutting down demand in the second largest oil market. However bad things look in the oil pricing arena, other commodities have been hurt more and their transport = baltic dry index is at record lows with capesize ships at negative rates - meaning they pay you to hire the ships so that they don't have to fire the crew and mothball the ship. 

It will look worse once China peaks out, if it hasn't already, it is at most 5 years away. 

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17 hours ago, Gerry Maddoux said:

So you don't consider Chevron, Exxon, Occidental, and Hess "smart investors?"

Gerry,

Chevron, hold a lot of legacy acres with high NRI in the Permian basin, so they are an exception.  Exxon has seen very low ROI on their tight oil capital allocation, I was mostly thinking of those who are independent investors and are looking for a place to invest their capital, there are far better places to invest than the oil sector.

So I am thinking in terms of the following chart from

https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?tab=learn&sector=10

energy v sp500.png

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