OPEC held a scheduled meeting last week and, for the first time in a while, actually came to an agreement. Details are sparse, but a production cut seems imminent.
In this week's episode of Industry Focus: Energy, host Sean O'Reilly and analyst Taylor Muckerman explain how much oil OPEC is planning to cut compared to the daily global production total, what we might expect to see in the next few months, how Goldman Sachs(NYSE: GS)is looking at the price of oil in the next few years, and more.
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Also, the duo examines why, according to EIA data, Americans used a record-breaking amount of gas this August, and why Enbridge(NYSE: ENB) is on their radar this week.
A full transcript follows the video.
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This podcast was recorded on Sept. 29, 2016.
Sean O'Reilly: Welcome to Industry Focus, the podcast the dives into a different sector of the stock market every day. Today isThursday, Sept. 29,2016, so we're talking aboutenergy, materials, and industrials.I'm joined in studio by The Motley Fool's very own Taylor Muckerman,who I am extremely anxious to talk with about yesterday's big news. Stop the presses: OPEC agreed to, on apreliminary basis, cut production. What?!
Taylor Muckerman: Yeah,that's what they said. There's no details.
O'Reilly: There were a few, to be fair.
Muckerman: Well, there are estimates.
O'Reilly: Let's take a step back. OPECsurprised everybody yesterday, sent oil up 5% to 6%. They had beentalking downthese discussions in Algiers for one or two weeks. "We want to cut,but this is just preliminary, we don't expect to decide anything." Russia and Iran talked it down, Saudi talked it up. It's a little verbal chess game. Then,yesterday [it] hits the wiresthat they agreed to a preliminary cut. Details are going to be announced in a month.
Muckerman: Nov. 30.
O'Reilly: Thesymmetry there is pretty funny. That date, two years ago ...
Muckerman: That's their bi-annual meeting, ithappens in November. That year, it was Nov. 24.
O'Reilly: So,right before Thanksgiving, they were like, "Yeah, we're not going to do anything," and oil plummeted. And here we sit two years later.
Muckerman: People werecooking their turkeys by the oil drum fires in 2014.
O'Reilly: Because it was so cheap.(laughs) But,correct me if I'm wrong,they're talking about, in a month, agreeing toactually setting firmly about a 750,000-per-day barrel decrease in supply.
Muckerman: That's what anIranian representative suggested. But if you look across the board,there's a lot of people that aren't quite sure it'll even reach 0.5 million barrels per day. But even if it was 700,000 barrels a day --
O'Reilly: Or five.
Muckerman: Either way, that's only 0.7% ofglobal oil production. It's not a huge earth-shattering thing. What is the big deal is that OPEC countries havereturned to the table andreached a conclusion, rather than just walking away with their hands up in the air.
O'Reilly: Right,Saudi Arabia and Iran are actually talking. One of them closed the other's embassy in their country a year ago. They were mean for a while.
Muckerman: These countries traditionally don't get along. This isn't totally resigned to just oil markets, when youlook at how these countries are playing chess against each other.
O'Reilly: ThePersian Empire invented chess.
Muckerman: Yeah. There's a little bit ofhistorical nature to that suggestion, as well. When you look at what they've been doing,Saudi Arabia is much more reliant, for budgetary reasons, on high oil prices, high oil revenues. Iran isjust having a field day because they hadall these sanctions against them --
O'Reilly: This is all free money.
Muckerman: Essentially. It's money they didn't have. So,they became less reliant on oil revenuesover that time period,and now they can sit on moreprices, higher production, for a little bit longer thanSaudi Arabia can. You look at Saudi Arabia cuttingministers' salaries by up to 20%, cuttingsubsidies across the boardto their civilians --
O'Reilly: They canno longer buy their solid gold Lamborghinis. I feel terrible for them.
Muckerman: I mean, you kind of have to at some point,because oil does represent a significant partof their overall budget --
O'Reilly: Their social programs,if you look at the oil ministries, it's everybody.
Muckerman: Yeah,everybody benefits when they sell oil at high prices. If you look at 0.7% of oil cutbacks, not a huge deal, especially when you look at the landscape in the United States with so many wells that have been drilled but not completed. Youlook at a research company likeRystad Energy suggests that 90% of wells that are drilled but not completed can beeconomically completed at $50 a barrel, which we're almost at. So, I think supply is going to be able to make up for lost ground,in terms of what OPEC issupposedly going to pull back on.
O'Reilly: On the other hand, I think it'sminuscule compared to global daily production size.
Muckerman: Yeah.I think it's just the significance of them coming to an accord,rather than walking away from the table.
O'Reilly: Inaddition to that, just to play devil's advocate a little bit,when the fateful day occurred two years ago,OPEC said they weren't doing anythingand they were going to go for market share, they weren't going to cut toguarantee a price, what was the globaloversupply numberper day?
Muckerman: More than it is today.
O'Reilly: That's my point. It was 1.5 million barrels a day oversupply? So, the 500,000 or 750,000 barrels per day that OPEC is talking about cutting -- granted, at this point --in addition to the gargantuan capital budget cuts that haveoccurred in the industry, I'm like, is the oversupply done?
Muckerman: Long-term,you could start to worry about that. But in the near term,like I said, you have almost 4,000, maybe over 4,000 wells in the United States that can be fracked at $50 a barrel. That could drive up U.S. production, which has been pulling backsince November of 2014, from record highs. So,you're seeing the ability of companies likeEOGandContinental Resourceswho have already startedto complete some of these wells in the $40 range,and then a company likeWhiting Petroleumthat was shopping itself forwhat looked to be pretty cheap.
O'Reilly: But there were no takers.
Muckerman: There were no takers. And here they are saying, "Once $50 a barrel comes around,we're going to start completing some these wells." By that,I mean that the wells have been drilled,but they haven't been cemented,encased, they haven't been fracked. So they're not producing. But it's traditionally the moreexpensive part of the whole process. So companies have been drilling these sites and letting them idle until they reach a certain dollarvalue per barrel. It seems to be $50 per barrel is that magic numberfor the broad majority of these wells. It has to besuch a big deal that the EIA has actually started to come out with a monthly report ofhow many wells are drilled but uncompleted. You have seen it come downa little bit since Januarybecause the price of oil has risen since January. If you look at January of 2014, there were around 2,500 wells that weredrilled but not completed. You'relooking at a little over 4,000 right now.
O'Reilly: Wow. It'sa lot of fun to go to an investor presentation for an EOG and look at what they're broadcasting two years ago versus today, in terms of numbers. It's hilarious how it's come down massively.
Muckerman: A dramatic change of pace.
O'Reilly: Speaking of the EIA, they justcame out with United States gasoline consumption, whichthey do on a monthly basis. Interested to get your thoughts on this.
Muckerman: I'm thinking August made news?
O'Reilly: A little bit, yeah. TheUnited States consumed 9.7 millionbarrels of gasoline per dayin August. That isa new record. It's a little bit more than the peakright before the Great Recession.
Muckerman: In 2007, right?
O'Reilly: Yeah. It'sinteresting to me because, correct me if I'm wrong,cars are way more efficient right now in miles per gallon.
Muckerman: Yeah, they're more. They're getting to be way more, but they'renot quite there yet. There's still a few more yearsbefore all the CAFE standards fully kick in. But,there are year-over-year requirements. What you're seeing is, asshort-sighted as Americans are, they'regoing out and buying record numbers of SUVs and trucksagain because gasoline is cheaper than it's beensince 2009. The cheapest Labor Day gas pricesin the last 12 years. SUV and truck sales have been outpacing car sales for quite a while now. You're looking at, if not record, near-record sales for SUVs and trucks, still. It just continues to rise. Thosestandards, because of increasing fuel efficiency standards,applied to the car based on what is called a footprint. So you're looking atlarger cars not having to meet as strict demand as quickly. So,these cars haven't really experiencedthe dramatic fuel efficiency gains as you've seen in smaller sedanslike aToyotaCamry or Corollaor those hybrid vehicles that have come out that get 50 to 60 miles to the gallon.
O'Reilly: Right. So, we've throwna lot of data points at our audience so far. You have OPEC who is notoriously untrustworthy. You have the supply and-demand statistics that are iffy on a global basis,but it is what it is.
Muckerman: Some people suggest the 2017 could be equilibrium for supply and demand.
O'Reilly: And then, the EIA, U.S.,lots of gasoline. Everybody's favorite investment bank,Goldman Sachs,always broadcasting their views,came out with an oil call.
Muckerman: This wasbefore the OPEC meeting.
O'Reilly: Yeah,granted, it was before the OPEC meeting.
Muckerman: They did address it, though. They addressed, "Hey, these are our thoughts if OPEC does X/Y/Z."
O'Reilly: How are they analyzing all this?
Muckerman: They're looking at U.S. production, they're looking at the fracklog -- which is drilled but uncompleted wells.
O'Reilly: Which iswhat you were talking about earlier.
Muckerman: They're looking atLibya and Nigeria bring back production. They're looking atmajor projects around the worldthat are coming onlinein Kazakhstan, Australia, things like that. And they're also looking atRussia and Saudi Arabia producing atrecord levels.They basically adjustedtheir prices downwardfor the end of 2016, they left their2017 expectations at $52per barrel.
O'Reilly: Which we're almost at.
Muckerman: Yeah, we'reonly a few dollars shy of that right now.
O'Reilly: Arethey being too conservative? Thesupply and-demandbalance next year.
Muckerman: I don't think it's all that conservativewhen you look at the overhang of wells that are not only drilled anduncompleted, but wells that could be drilled andcompleted next year in the United States at $50 to $60 per barrel.
O'Reilly: Whenyou say that, are you talking about the Permian rush?
Muckerman: ThePermian, Eagle Ford,all these basins can still be produced in -- well,not all of them, but a significant portion of these heavy-producing basins, the Eagle Ford,the Bakken, and the Permian, which is the darling of the day right now, can be produced in that $50 to $60 range. So, there'sdefinitely some downward pressureas you see upward movementin prices. I don't think that overhang is gone. We still have thataccessible oil that can weigh onprices whether it's being produced or not, because there's always a threat of production. So they've lowered their global oil priceforecast for the end of this year from $50 per barrel to $43 per barrel. They did say that any OPEC decision could add some near-termupward momentum. And we saw that 5% to 6% jump yesterday. But, "near-term" is the key term there. I do thinkin the next couple years there's going to be downward pressure. I don't think, unless it's just a temporary spike, $70 isway out of the picture in my mind for the next year or two.
O'Reilly: Againplaying devil's advocate, Goldman in the end of 2014 was in the "$90 forever" camp.
Muckerman:The unpredictability of OPEC, right? Ifsomething happens, that unpredicted spike that we talked about could happen. But if OPEC only lowers production by 500,000 to 750,000 barrels, you don't see any civil arrest incountries like Iran, Nigeria, Libya --
O'Reilly: There'salways a nice little possibility.
Muckerman: There is. I think, now, that would have an impact on prices.
O'Reilly: Because things are a little bit tighter.
Muckerman: Whenyou look back to 2014 or 2013,there was a lot of unrest. In 2012, you had all of Arab Spring going on --
O'Reilly: That'swhy I always thought the drop was all the more surprising.
Muckerman: Youdidn't see any upward movementwhen countries like that were shutting in production due to somevolatilityamong the countries there. That should have been a warning sign for a lot of people, whencountries that are heavy oil producers, thatimpact the global supply, are shutting in supply, and prices aren't spiking.
O'Reilly: Yeah,I remember when Libyafirst started blowing up -- there are human beings there, so I don't want to begrudge what happened there. But, oil would go up, oil was going up, this was, what, 2011? Anyway. Before we close out here, we covered a lot of awesome info, I got your insights on whether OPEC can betrusted or not. The answer is no.(laughs)
Muckerman: Well,until they actually detail specifics --
O'Reilly: They're hurting, though.
Muckerman: They will cut. Butyou have to understand thatnow, the discussion is coming down towhich countries cut,how much does each country cut,for how long are they placing this cap on production. And also, we're at recordproduction for a lot of these countries.
O'Reilly: Yeah,absolute peak. Russia is that, what, post-Soviet highs?
Muckerman: Yeah. And they weren't really included in that cut, so they're justgoing to be sitting in high clover --
O'Reilly: Darn you, Putin! Darn you! You played them for fools! The bad kind.
Muckerman: That'swhat we're looking at now, isspecifics in two months from now.
O'Reilly: Before we close out,I'm anxious to get your thoughts on a stock to watch,maybe a good stock for everybody hereto look into,given all the information that we've covered.
Muckerman: I thinkone aspect of oil and gasthat could benefit from an increase in U.S. orNorth American production,based on the supply cutsand rising oil prices, would be a midstream company. I'm aSpectra Energyshareholder, so I've been uber interested in the past few days,because the news cycle has died down onEnbridge.
O'Reilly: It's a stock-for-stock deal.
Muckerman: Yeah.I really want to dive in. My blink reaction is, "Yes, I'll be happy to own Enbridge." It'sbecoming much more a balance between an oil and natural gas with this acquisition. The footprint is just massive. So,I just want to really dive in.I think shareholders of either companyright now are going to be well rewardedfor the long term. And I think people could probably buy into Enbridge right now,but I just haven't given it the timenecessary. But I lovethe fact that they predicted a 10% to 12%dividend hike each year for the next eight years. I've never seen an eight-year prediction.
O'Reilly: That's surprising.
Muckerman: It's the longest I've ever seen. So,I'm not necessarily trusting it completely, because eight years is a long time in the oil and gas sector.
O'Reilly: Plans make fools of us all.
Muckerman: Yes. But, just the fact that management is confident enough to come out and say that in the face of a lot of upstream companies cutting dividends,Kinder Morgancutting the dividend, I appreciate the safety that you see on both of these balance sheets. I think it's going to be a happy marriage.
O'Reilly: Bottom line, we don't know what will happen with prices, per se. But it looks like the supply flow, which is good for people that move oil and natural gas, is going to be good now.
Muckerman: Especially in North America. You've seen production cutbacks because of low oil prices, and then you see all these companies now talking about efficiency gains and being able to produce more at $50 to $60 a barrel. So,if prices to continue to rise slowly, you're going to see North American production come back.
O'Reilly: Awesome. Thanks for your thoughts, Mr. Muckerman.
Muckerman: Yeah, thank you.
O'Reilly: Have a good one. That is it for us, folks. We'dlike to give a special shout-out to theone and only Austin Morgan who is back thereworking his studio magic.If you're a loyal listener and have questions or comments, we wouldlove to hear from you -- just email us at email@example.com. Once again, that is firstname.lastname@example.org.As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hearon this program. For Taylor Muckerman,I am Sean O'Reilly. Thanks for listening and Fool on!
Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman owns shares of Spectra Energy. The Motley Fool owns shares of and recommends Kinder Morgan and Spectra Energy. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.