Much More Pain Ahead In The Energy Sector

Much More Pain Ahead In The Energy Sector

$OIL, $USO

There is the belief in the Ozone that Crude Oil has reached a bottom down here in the low 40’s.

Recall, that was also the belief a couple of months ago when Crude Oil was in the low 50’s. These beliefs are about hope not the fundamentals.

There is a supply/demand imbalance operating within the energy complex despite the collapse in Crude Oil prices and rig counts, supply has steadily grown over the past several months.

The last time that supply was this high was about 20-yrs ago, and imbalance in supply was resolved. The subsequent surge in rise in Crude Oil prices, from extremely suppressed levels of production, supported the push into the fracking boom and a surge in supply without a subsequent increase in the demand to consume it.

The ending was inevitable and a function of timing, that was then, this is now, history repeats…

The current rise in supply is again exceeding weakness in global demand. Given this backdrop of the structural shift in employment dynamics and excessive indebtedness, it is unlikely that economic growth will grow to a point that will increase the demand side.

This tells us that Crude Oil prices can get/be/stay stuck in a lower trading range for many years to come as the reversion process clears the excess supply overhang.

The supply/demand imbalance was resolved in the US by the fracking boom as new technologies allowed for the extraction of Shale Oil. The rush into the Oil Patch caused many financial institutions to issue debt, much of it classified as high yield, to the industry producers.

Now many of these financial institutions are anticipating defaults in Y 2016 as currently hedged Crude Oil prices are un-hedged into end of this year.

Now the access to cheap capital has been cut off to the marginal industry players, and even larger producers are having a hard time obtaining capital. If Crude Oil prices remain at these lower (and going lower) marks in the months ahead, there is going to be more  turmoil in the Oil Patch in Y 2016.

My take is that Crude Oil prices will remain low and lower for a very long period of time as seen in the 80’s and 90’s. And that the lessons of the past will be re-learned as to the dangers of fundamentals, leverage and greed.

That being the case, I see more pain ahead before this cycle completes.

There are way too many individuals chasing yields in MLPs and speculating on bottoms in energy-related companies to suggest a true bottom has been reached in here.

Sure, there will be good, perhaps great trading opportunities in the energy sector short-term, the real opportunity likely lies ahead, beyond Y 2016.

Long-term investment opportunities align when the supply/demand imbalance is corrected, and when the energy sector is very much out of favor.

Stay tuned…

HeffX-LTN

Paul Ebeling

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