Governments are desperately trying to prop up oil prices…
If you’ve been reading the Dispatch, you know the oil market is in crisis. The price of oil has plummeted 73% since June 2014. Last Thursday, oil closed at $26.21, its lowest level in 13 years. Low oil prices have sparked a global sell-off in oil stocks.
• The world has too much oil…
Technologies like “fracking” have unlocked billions of barrels of new oil in shale regions. U.S. oil production jumped 45% from 2007 to 2014. Production in U.S. shale regions jumped eightfold. And global oil output hit a record high last year.
• Despite low prices, the world’s three biggest oil-producing nations are pumping massive amounts of oil…
Saudi Arabia is pumping near record amounts of oil. Oil production in Russia is at its highest level since the Cold War. The United States is pumping at its highest level in decades.
The world can’t consume the oil fast enough. The global economy is oversupplied by about 1.8 million barrels per day (bpd).
Companies are running out of places to store all the oil. Some producers are selling barrels at huge discounts just to move them.
• Yesterday, four major oil-producing countries agreed to a production “freeze”…
Bloomberg Business reported yesterday:
Saudi Arabia and Russia agreed to freeze oil output at near-record levels, the first coordinated move by the world’s two largest producers to counter a slump that has pummeled economies, markets, and companies…
The deal to fix production at January levels, which includes Qatar and Venezuela, is the “beginning of a process” that could require “other steps to stabilize and improve the market,” Saudi Oil Minister Ali Al-Naimi said in Doha Tuesday after the talks with Russian Energy Minister Alexander Novak. Qatar and Venezuela also agreed to participate, he said.
• The agreement isn’t a done deal…
For the deal to take effect, Iran and Iraq have to agree to freeze production too. That might not happen…
Oil makes up 98% of Iraq’s exports. Iraq’s economy doesn’t exist without oil. So it has little choice but to keep pumping. Iraq has increased its production to record levels to fund its fight against the terrorist group ISIS.
Iran also depends heavily on oil. It’s the world’s sixth-biggest oil producer. Oil makes up 68% of its exports.
At this point, it’s unclear whether Iran and Iraq will cooperate with the production freeze.
• Iran plans to double its oil exports…
You may recall the U.S. and five other countries lifted economic sanctions on Iran last year. These sanctions were put in place to prevent Iran from building a nuclear bomb. The sanctions cut Iran off from global financial markets and crippled its oil industry. Since 2011, Iran’s oil exports have plunged 45%.
With the sanctions now lifted, Iran hopes to increase its oil production and double its exports. According to MarketWatch, Iran has ramped up oil exports by 400,000 barrels recently. Last week, Iran sent three oil tankers to Europe for the first time since 2012.
The director of Iran’s state-owned oil company says it has no plans to limit production until it gets back to pre-sanction levels.
Asking Iran to freeze its oil production level is illogical… when Iran was under sanctions, some countries raised their output and they caused the drop in oil prices.
How can they expect Iran to cooperate now and pay the price?
• The price of oil fell 1% on the news of the production freeze…
This suggests investors don’t think the production freeze will cure the world’s oversupply of oil. The Wall Street Journal explains:
Even a global production freeze at January’s levels would leave the world with about 300 million barrels of oil produced above demand. That doesn’t include oil stored in tanks, which stands at more than 3 billion barrels just in the industrialized world, according to the International Energy Agency….
The Wall Street Journal went on to explain that freezing production isn’t enough. The world needs production cuts.
Halting production increases won’t likely help reduce the world’s oversupply of oil in the short term. Qatar and Venezuela were already producing at or near capacity, Russia’s production is expected to be flat or decline this year, and Saudi Arabia’s output wasn’t expected to increase significantly.
Although yesterday’s big oil deal won’t erase the global oil surplus, it’s still significant. The production freeze is a sign of despair in the oil sector. And signs of despair often mean a bottom is near.
• Many oil companies won’t survive…
Last year, energy consulting company Wood Mackenzie estimated that $1.5 trillion worth of oil projects in North America can’t make money at $50 oil. With oil below $30 today, it’s safe to assume at least $2 trillion worth of projects are losing money.
According to The Wall Street Journal, U.S. and Canadian oil producers are losing more than $350 million a day at current prices. One in three U.S. companies is now at high risk of going bankrupt.
• A wave of bankruptcies could trigger another leg down in oil stocks…
Exxon Mobil (XOM), the largest U.S. oil company, has dropped 20% since June 2014. Chevron (CVX), the second largest, has dropped 35%.
The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks 63 U.S. oil producers, has plummeted 70% since June 2014.
The Market Vectors Oil Services ETF (OIH), which tracks 26 oil services companies, has plunged 59% since June 2014. Oil services companies sell “picks and shovels” like drill equipment to oil producers.
• The oil market is cyclical…
It goes through big booms and busts. Although we don’t think oil has bottomed yet, it’s time to start thinking about buying high-quality oil stocks at bargain prices.
• Louis James, editor of Casey Resource Investor, is getting his “shopping list” ready…
Louis is Casey’s resource guru. He’s seen commodities boom and bust many times in his career. Right now, Louis sees huge opportunities forming in the oil market. He’s watching Exxon Mobil and oil pipeline company Kinder Morgan (KMI) for the right time to buy.
Falling oil prices have slammed both stocks. As we mentioned, Exxon has fallen 20% since 2014. Kinder Morgan has plunged 57%. It’s near its all-time low.
Louis expects both stocks to deliver huge gains during the next oil bull market. He’s following both stocks in Casey Resource Investor, our advisory focused on making money in energy, mining, agriculture, water, and other natural resource stocks. Click here to try out Casey Resource Investor risk-free.
• Switching gears, technology stocks have tanked this year…
The tech-heavy Nasdaq has dropped 10% this year. It’s fallen almost twice as far as the S&P 500 and Dow Jones industrial average.
Since tech stocks are getting cheaper, we asked Chris Wood, editor of Extraordinary Technology, for stocks on his “shopping list.”
• In this short essay, Chris explains that huge opportunities are shaping up in the robotics market…
I think the robotics market is on the cusp of exploding…
Costs are coming down, and roboticists are starting to solve technical problems that have stumped them for years.
The $35 billion global robotics market is divided into two categories: industrial and service.
Industrial robots help us build things like cars. Today, they make up more than 80% of the market. But outside of China, industrial robots are only set to grow at about 6% a year through 2020. So there are limited opportunities for investors here.
On the other hand, service robots, which perform tasks other than building things, are on track to grow at more than 22% a year over the next five years.
Doctors use service robots to operate on patients… scientists use them to explore the ocean… soldiers use them to dispose of bombs and provide surveillance… and many people use them to perform daily chores.
Today, medical robots make up the biggest slice of the service robot industry in terms of sales.
Titan Medical (TITXF) and TransEnterix (TRXC) are my two favorite companies here. Both are developing smaller, more affordable minimally invasive surgical robots.
But Titan’s stock trades over the counter, meaning it’s not liquid and could be difficult to sell. I recommend waiting to buy until the company moves up to a major exchange like the Nasdaq before buying.
TransEnterix is too expensive at current prices after rumors of a buyout by Johnson & Johnson caused its stock to pop. But it’s definitely on my radar.
Outside the medical space, my favorite company is iRobot (IRBT), maker of the popular Roomba vacuum robot. The Roomba accounts for about 80% of iRobot’s annual sales… but there’s still huge opportunity.
Traditional vacuum cleaners still make up 80% of the market. As the technology improves, robotic vacuums should steal market share. It’s a $7.2 billion opportunity for robotic vacuum companies, and iRobot is in the best position to dominate the market.
At current prices, iRobot is too expensive. I’m waiting for the stock to pull back. I’ll let subscribers know as soon as it’s time to buy. You too can learn about these opportunities by signing up for a risk-free trial of Extraordinary Technology.
Chart of the Day
The world’s oil surplus isn’t going away anytime soon…
Today’s chart shows the difference between global supply and global demand for oil. The blue bars show when supply exceeds demand.
As you can see, the world has had an oil surplus since the first quarter of 2014. Last quarter, the global economy was oversupplied by about 1.8 million bpd. The U.S. Energy Information Administration (EIA) expects this surplus to last until the third quarter of 2017. After that, the EIA expects supply and demand to balance out.
As long as there’s an oil surplus, oil prices will likely stay low. That’s bad news for oil companies that need high oil prices to make money.
Delray Beach, Florida
February 17, 2016
We want to hear from you.
If you have a question or comment, please send it to [email protected]. We read every email that comes in, and we'll publish comments, questions, and answers that we think other readers will find useful.