As the “so called” experts, general investor crowds, institutional investors, energy experts, new letter and internet pundits, and the varied array of financial and energy analysts (of whom all who were 100% wrong over 18 months ago) begin to scream for attention and loudly state that the near death of U.S. shale is upon us, we should ignore them all and look at facts and the obvious. This mass exodus clearly defines the time has arrived to make plans and pick your direction to invest in energy over the next 12-36 months.
We should all know, as smart investors, that the bottom 5%-10% of West Texas crude oil price declines have arrived. We should be smart enough to know that this is the time to dig in and prepare for a rebound. It has taken eighteen months for crude oil prices to fall over 70%! It will also take 18 to 36 months for crude oil prices to rise to a normalized level of $70-$80 per barrel based upon West Texas Intermediate pricing. Why? Because thousands of wells were drilled knowing that $30 a barrel was near breakeven and the producers will not operate at a loss and simply shut the wells in until prices rebound or cut back the open flow chokes to minimize output.
The U.S. energy producers are like rats who know when to scrounge to survive and when to feast when the market and supply is abundant. They are scrounging now and will survive. Some will perish and others will get fat! The market will heal over the next short period of 18-36 months. Remember, the U.S. consumes daily over 18 million barrels of crude oil. The industry will see less exploration and drill wells with 65% first year decline curves. Know we are being forced to create carnage among our service companies and exploration teams, putting that back together when prices rise will take a long time and be very moderate due to “fear”. Thus, what we lose in declines and less drilling, will not be replaced for quite some time. Now, think about what global pricing does when you knock out 1 to over 2 million barrels per day domestically over the next 18-36 months? I see oil back to $70-$80 as a barrel at the end of 36 months or December 2018.
Time is the one element that exploration, production, and replenishment cannot control. Time to rebuild supply. Time to plan and finance a new exploration after this current implosion. Time to find the intellectual assets to run the rigs, drill the wells, produce the wells, and then transport that supply. Time in this particular industry is a key part of your job as an investor that you must understand and be willing to accept. However, in my over thirty years of being in the energy game, I always see investors who freeze when opportunity is upon them. I have seen those investors who want or should be “in” the energy investment business, but wait until it is too late and miss the boat repeatedly.
I will bet my 30 years of expertise in the U.S. oil and gas industry that we will not see oil stay below $30 a WTI barrel longer than 90 days this year. At that price or below $30, oil supplies will fall dramatically due to the uneconomic shutting in of older wells and new wells that are classified as marginal or uneconomic. At prices at $30 or below and these strained economic levels due to the well’s age, the quality of their product type or their individual well profit versus loss due to the costs of transportation and processing will be greatly affected. (See the link below on “oil worth less than nothing”).
Opec Sees Deeper Decline In Rivals Supply As U.S. Shale Falters
The North Dakota Crude Oil That's Worth Less Than Nothing
When others flee, we must dig in and buy good assets at the discounted prices that we are being presented with today.