Oil Prices Look Like They Want Higher
There is no real logic in discussing oil prices, or anything else for that matter, when Bitcoins move higher by 10% on a daily basis. Nevertheless, I am bullish on this sector. In the immediate term, there is plenty of reason for oil prices to run – especially heading into the long awaited Aramco IPO; the Saudi Arabia state owned oil giant valued at $2 trillion plus. This IPO is fixing to raise a cool $100 billion from its offering, providing a handsome pay day for the crown prince and company.
There has been some speculation surrounding the Aramco IPO; suggesting that Saudi Arabia is feeling somewhat pessimistic about future oil prices and thus is using the Aramco IPO to exit. I disagree with this thesis, however, seeing that they are floating a mere 5% of the total company. That figure, $100 billion, is nothing more than a novelty amount for the prince and his inner circle. In addition, major global oil conglomerates hold well diversified portfolios in other assets than oil and are not fully reliant on oil prices to expand their businesses.
I’ve been bullish on European/Middle Eastern based oil co’s for a few months now, namely RDS and BP. I’ve been watching RDS since $54, and I think I’ve missed out on quite a move, albeit I still believe there is plenty more to come. During that time, oil prices have come out of consolidation and have started to perk up, offering North American oil co’s some respite from the perilous situation they found themselves in a few short years ago; selling oil at prices lower than cost. That’s one problem with this business; you can’t simply shut down commerce even when you are losing money due to it’s complex nature of operations.
At oil prices today, a touch above $57, even Canadian oil companies are profiting well, with a cost per barrel somewhere in the low $40’s. In the middle east, they drill a hole in the ground and oil gushes out like water, whereas in Canada they must frack it from oil sands; an expensive process that raises costs significantly. The cost of producing oil in Qatar is a quarter of the cost in Canada; around $12. In Kuwait that number is closer to $8.
I would never speculate on commodity prices directly, and never will; that is a pikers game to play. However, I do like the action I am seeing in large-cap, non-American oil co’s. Trends don’t lie and I know a sector supported by strong demand when I see one. Something is stirring in this industry, and whatever it is will likely surface over the next decade or so. That’s the beauty of investing – taking calculated bets at the unknown. When all the pieces are connected it is already too late.
Thats me being optimistic. If the above trend perpetuates, unquestionably, some of that wealth spill over into alternative energy – a sector those same players have been laser focused on and have the capacity to own.