Should auld markets be forgot and never brought to mind? Should auld markets be forgot and auld lang sine?
Not on you life! Oil put in its second back-to-back losing years since the eighties but perhaps its time to remember what happened the year after that first loser! The last time oil put back to back losing years in in 1997 and 1998, the following year of 1999 gave a historic comeback and cemented a bottom in oil prices for a generation. After falling over 30% in 1997 and 1998, in 1999 the oil market rebounded almost 107%! That’s why this year, as I have written before, crude oil is getting ready to party like its 1999.
The comparisons to what happened in the late 1990’s and what is happening now are almost uncanny. Energy companies were bleeding cash and it set of merger mania as energy companies big and small had to do whatever it took to stay alive. In 1999 Exxon Corp. and Mobil Corp. agreed to an $82 billion merger that created the world’s largest publicly traded oil company (N:XOM), which sounds kind of cheap in this day and age. Not long after in 2001, Chevron Corp. and Texaco Inc. merged to create the world’s fourth-largest investor-owned oil company, known as ChevronTexaco (N:CVX) for a mere $45 billion dollars.
Fast forward to today. The Wall Street Journal is reporting that Tudor, Pickering & Holt, an energy-focused investment bank, has tallied 150 projects that have been delayed, resulting in an estimated 13 million barrels a day of oil production deferred indefinitely. That is equal to 15% of total global output.
This year has been the year of the double dip for crude oil. Prices were recovering until Greece voted to leave the eurozone for a few minutes. Then after their banks were drained, they voted for it before they voted against it or something like that. You also had the China stock market crash which also raised fears and the supposed return of Iranian oil as sanction are supposed to be lifted. But hold on, is it a done deal?
The Wall Street Journal is reporting that the U.S. is going to put more sanctions on Iran, which may cause some problems for the return of Iranian oil back to the market. The Journal reports, “The Obama administration is preparing to impose its first financial sanctions on Iran since it forged a landmark nuclear agreement in July, presenting a major test for whether Tehran will stay committed to the deal. The planned action by the Treasury Department, U.S. officials told The Wall Street Journal, is directed at nearly a dozen companies and individuals in Iran, Hong Kong and the United Arab Emirates for their alleged role in developing Iran’s ballistic-missile program. Iranian officials have warned the White House in recent months that any such financial penalties would be viewed by Supreme Leader Ayatollah Ali Khamenei as a violation of the nuclear accord. So if the deal falls apart that may be another catalyst for oil to try to repeat its comeback of 1999.” That along with more pain with energy bankruptcies continues to bombard the oil market. Capital spending cuts as well as the normal rate of production decline is hitting the market. The Wall Street Journal today reports that the oil industry needs to replace 34 billion barrels of crude every year to satisfy expected consumption growth, according to Rystad.
I also think that many people are underestimating demand growth next year. This year we saw demand growth globally, the strangest in over a decade. We saw gasoline growth in the U.S. the strongest in 30 years. Demand growth in China may double next year as they fill their strategic reserves and stimulus give oil demand a boost. And all of that manufacturing that China wants to get rid of, will be picked up in India and Vietnam and other Asian countries. European demand should also rebound.
While there is no doubt that today the oil glut seems insurmountable, history shows us that a new year brings new hope and after back to back down years, higher prices.
Happy New Year!