Am I the only one who thinks this a huge opportunity to buy into the oil/energy sector?
Here's how I see it:
Oil prices have crashed due to consistent oversupply. Oversupply happened because OPEC, particularly Saudi Arabia, wanted to put the US oil industry out of business as they were worried about losing market share as the US oil industry grew. OPEC is accomplishing this by producing oil at full capacity and flooding the world with supply. This was followed by every other oil producing nation, also trying to not lose market share, going to full production capacity which created even more supply. Oversupply still exists but looks to be coming into balance by the end of 2016. This is because with the sustained downturn in oil prices, new wells and exploration were cancelled or delayed, especially in the US. It affects the US oil industry so much because they have higher costs to produce oil that the Middle East countries do. Sustained low oil prices should force the higher cost producers to scale back production. Some have already declared bankruptcy and more will. We are talking about possibly a third of the US oil industry (http://www.wsj.com/articles/oil-plunge-sparks-bankruptcy-concerns-1452560335). At current prices, it is believed most of the US oil producers are losing money. That would explain why the US oil rig count has gone from a high of 1600 in late 2014 to just under 467 now (see attached chart). Supply production is currently being destroyed fast. Another problem is the existing stored inventory (503 million barrels at last count - http://money.cnn.com/2016/02/04/investing/oil-prices-space-us-inventories-supply-glut/index.html?iid=surge-story-summary). The most in 80 years. Even after the supply and demand picture is back in balance, it will take time to draw down on the inventory reserves.
Outside the supply and demand picture, there is another reason why the price of oil should have trouble staying this low. OPEC countries need the revenue from higher oil prices. It's not that their production costs are high, they aren't. In fact, they are very low. Maybe as low at $1 per barrel in some places. The problem is that OPEC countries support their budgets from the oil revenue. They need much higher prices - http://www.bloomberg.com/news/articles/2015-11-30/oil-states-need-price-jump-to-balance-budget-opec-reality-check. It's getting so bad that 6 OPEC nations are requesting and emergency meeting - http://oilprice.com/Latest-Energy-News/World-News/Six-OPEC-Members-Plus-Russia-Now-Open-to-Emergency-Meeting.html.
In conclusion, it looks like there are supply and demand forces that will bring the price of oil higher eventually. It is likely to start over the next 2 year period if nothing affects the global demand picture such as a global recession. There are also political forces at work that should push the price up also. While I'm sure the price of oil could go down from here over the next 2 years, it seems like a solid bet that oil should be significantly higher 5 years from now. Any geopolitical problem in any oil producing country would also push the price up. Also, the world is literally pumping oil at full capacity. There is no room for increased production at the moment and it will take time to create new supply by exploration and drilling new wells.
Any thoughts? Am I missing something?
You are missing the dramatic increase in operation efficiency for drilling tight wells in the onshore US and appreciation of the US dollar vs international currencies.
EOG reports a 60% decrease in drilling time for its Bakken wells, and a 20% decrease in drilling time for its Permian wells (costs are down between 15-20%). While this doesn't entirely explain the precipitous drop in US onshore rig utilization rates (pricing pressure has certainly played a part in that), fewer rigs are needed now in 2015/2016 than between 2010-2014 to maintain/expand crude oil production. Rig utilization rates have also been affected by infrastructure bottlenecks (lack of available pipeline/train takeaway capacity) from many isolated tight plays. So, just because the rig count has dropped from an all-time high, there is no guarantee this will influence future oil prices. There is several million BOD in slack domestic/export capacity (think Kashagan, Canadian bitumen, pre-drilled uncompleted tight wells - numbering more than 1,000 across most major tight US plays, Libya, Iraq, and Iran, and Saudia Arabia) that can put downward pressure on global prices (think Brent, Bonny, Arabian Sweet, etc) that can keep a lid on local WTI prices as refiners work through cheaper global alternatives. If you look at the previous supply/demand dislocation in the oil market that started with the Arab oil embargo of the 70s, you see price expansion (70s to early 80s) then correction (late 80s to late 90s) through a 20-year cycle. This current correction is a year in, after a 14-year period of price expansion (with a rapid swing in prices during the 2009 global recession), and no assurance that support will be quick to form at pricing levels seen between 2010-2014.
Additionally, the US dollar has appreciated roughly 30% against a basket of foreign currencies, which also puts downward pressure on commodities (such as oil) that are almost exclusively traded on a dollar basis globally.
Moreover:
1) US fuel economy standards will continue to improve
2) European oil demand remains stagnant to slightly contracting
3) Chinese oil demand failed to grow YOY 2014/2015
4) Russia cannot shut in wells due to temperature challenges of developing Western Siberian fields; if there is any cooperation between OPEC/Russia Russia will have to agree to shelve any new drilling plans in Western Siberia
5) OPEC has been unable maintain production at its target quota for years
6) Lack of capital discipline among most majors (BP, Shell, Conoco!, Chevron) - these companies are run by people who for some reason seem to think each leg up in the commodity cycle will not be followed by a leg down. Conoco raised its dividend last year, only to cut it this year to a 10-year low. A similar corporate landscape was present in the 80s/90s downturn (last period of mega-mergers for survival of low oil prices - Gulf, Cities Services, Amoco, Sohio, ARCO). This needs to work itself out - these companies spent hundreds of billions of dollars on megaprojects like Gorgon, Kashagan, Kizomba, PNG LNG (many of which are just coming onstream) that need to produce at design capacity ASAP for cash flow reasons, which will continue to add global supply pressure.
Combine this all together and recovery of sustained WTI/Brent prices around $60/bbl seems unlikely. The US onshore situation is going to take some time to work through the excess of 2009-2014 (negative cash flow wells financed with debt, etc, some corporate bankruptcies - just like the 80s). If something cataclysmic were to happen to supply (rapid inflation against USD purchasing power, Saudis take Ghawar offstream, Kuwait takes Burgan offstream, a direct non-proxy Iran/Saudi war) you could approach $100/bbl, but probably not for a sustainable period of time without a significant OPEC shut-in (like the 4 MM bbl a day cut in 2009) and some downward pressure on the US dollar.