New market thoughts from Raymond James’ Jeff Saut: “Boone” 12/29/17

“Hey Jeff, I liked your comments about copper and crude oil prices yesterday and that they are suggesting a strong economy going forward. Can you please elaborate on my client’s concerns that oil supply will vastly exceed demand and therefore we should not own any energy stocks.” . . . A Raymond James financial advisor
First, let us remind y’all of our conversation of a few weeks ago with our friend Jerry Sullivan a portfolio manager of the Investors and Multi-Cap Core Funds at Putnam Funds. When asked what he was buying his response was “midstream limited partnerships (MLPs).” I own the Putnam funds managed by Jerry and have highlighted some of the favored MLPs from our fundamental energy analysts in these missives. I continue to recommend checking our fundamental research on the MLPs for specific recommendations.
As for crude oil, many of you know that I know the legendary energy investor of our lifetime, namely Boone Pickens. In fact, we did a fireside chat with him in front of a few thousand investors a few years ago over in Orlando. In a recent conference call, Boone made the following points:
1) OPEC raised its global demand forecast for 2018 – led by global economic growth – Increasing Demand
2) OPEC reiterated its determination to tighten the oil market – compliance up more than 100% amongst the members – Decreasing Supply
3) A better than expected demand picture globally – revisions higher by EIA and OPEC – Increasing Demand
4) Incredible demographic trends – emphasis on Southeast Asia, China, India – Increasing Demand
5) Mitigating factors (constraints) that limit the potential for a supply response domestically – access to trucks, labor, water, sand etc. – Decreasing Supply
6) Geo-political risk – Venezuela, Saudi Arabia, Iran – Supply Risk, not currently priced into market.
7) Crude curve in backwardation – signaling strong immediate demand and a tight oil market.
To listen to the conference call the numbers are 1.888.843.7419 (passcode 6363029#). While the call was hosted by two of BP Capital’s portfolio managers, there is no doubt that Boone’s opinion was present. One excerpt from the call reads:
For crude, apart from a temporary US inventory build due to [Hurricane] Harvey, significant inventory reductions have occurred across the globe. This can be chalked up as a success for OPEC in its goal to reduce inventories back to the five-year average, which, despite prior widespread doubts, now seems on track.
It is also indicative of a very positive global demand picture, where “days of oil supply” has moderated even more than the absolute figure for total supply of barrels. The increased tightness in crude is best evidenced by the forward price curve for Brent crude. Counter to its contango shape a year ago, Brent is now in steep backwardation, suppressing the economic rationale for producers or speculators to hold inventories. The US (mainly at the Cushing, OK hub) is now the only market where excess stocks can still be found. Nevertheless, we expect those inventories to also be whittled down in upcoming months, particularly with the Brent-WTI spread now as wide as roughly $6/barrel. This large spread implies US crude exports are likely to remain near what is today considered maximum levels. Moreover, further support for crude demand should stem from robust crack spreads (refined products pricing minus crude prices) at refineries, many of which have deferred fall maintenance given their high levels of current profitability. All in all, WTI realized a 12.2% price jump in 3Q, while the Brent crude price rose an even stronger 20.1%.
This morning the preopening S&P 500 futures are up 7 points at 5:17 a.m. and the February crude oil futures have traded to $60.11. This is probably to be expected as the usual suspects boost stocks for end of the year performance reasons. Of interest is that the NASDAQ has declined on the last session of the year for 14 of the past 16 years. Happy New Year everyone. . .

Download the full document here

Leave a Reply


captcha *