“Are we nuts to devote such a large allocation to energy?”

That’s what the September FPA Capital Fund letter just asked of shareholders.

The firm – along with Towle Deep Value and Mount Lucas US Focus Equity – were among many betting U.S. production could fall sharply, setting the stage for $65 to $70 oil…

But that hasn’t happened.

However, they have to be pleased that after a sizeable 35% drop over the summer, oil is finally showing signs of life…

Since late August – in fact -- oil prices have rallied some 10% thanks in part to a smaller weekly-build in U.S. crude prices, and a 785,000-barrel draw on Cushing supplies…

Investors have even been returning in droves.

In fact, just recently they’ve pumped $379.4 million into the United States Oil Fund.

There’s even been a steady stream of insider buying.

Insiders just recently bought $399,328 worth of Exxon Mobil (XOM) at $78.07.  They bought 4.9 million shares of Diamond Offshore (DO) between $20.84 and $21.12.

One insider recently paid $694,800 for 10,000 shares of Occidental Petroleum (OXY).

But we’ve seen this bullishness before… at least six times since late 2014.

And each time, investors – and insiders -- have lost big.

While investors hunt for a bottom, smart investors know it’s still too early.

We Have More Oil than We Know what to do with…

Nothing has indicated that the global glut of crude is easing.

The International Energy Agency (IEA) warned that oil supplies are not declining sharply enough to mop up excess supply.  And while demand growth has rebounded over the last year, the outlook for demand “is looking softer next year,” they warn.

The U.S. Energy Information Administration (EIA) also tells us inventories still remain at levels not seen in 80 years.  Reluctance by major oil producers around the globe – and new supply likely from Iran (tens of millions of barrels) – will keep oil prices depressed.

When inventories return to norm, and we begin to see some balance in supply and demand, the days of low oil prices will be over.

That’s not likely to happen soon, though.
That’s because there’s a glut of supply, and not enough demand to mop it up.  Look at the volume of crude sitting in tankers parked in the Gulf of Mexico, for example.

There’s 20 million barrels – twice as much as the norm – just sitting.

That suggests that storage is short, or there just aren’t many willing buyers.  It means there is further weakness in oil markets because supply outweighs demand.

Look, insiders can buy.  Headlines can blare the bottom is in.  Investors can hope for a bottom, betting big on upside.

But we do not see signs that a bottom is firmly in place.

The biggest problem with smaller and mid-sized oil companies is that they’ve added large amounts of debt over the last five years.  With plunging revenues, many are reporting hefty losses along the way, too.

Many may be forced to file for Chapter 11 bankruptcy protection, even be forced into reverse stocks splits.

When we begin to see these companies turn around their bottom lines, we’ll recommend them – and oil -- again.

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