market folly

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Andy Hall of Astenbeck Capital who talked about his outlook for oil.


Andy Hall's Invest For Kids Chicago Presentation

•    Presentation is the outlook for oil.
•    Rarely consensus view for oil has been this pessimistic.
•    Saudi Arabia/Worries over China – murky long term outlook for oil and fossil fuels. Running out of storage perhaps. Cash costs production avg $20 per barrel.
•    Perception is worse than reality. Q3 stock build at 500K BPD vs estimate of 1.6MM BPD.
•    Q2 estimated surplus revised lower by 900 KBPD.
•    No super contango means no distressed surplus of oil in contrast to 09 and 86.
•    Global oil demand growing at 2MM BPD so far in FY15, double the rate predicted at beginning of the year.
 •    Chinese demand growing at 7% YoY, led by gasoline and jet fuel.
•    Demand response to lower prices has already reduced surplus. Current oversupply is not just crude oil but also NGLs.
•    Overall surplus will continue to shrink and become a growing deficit in h2 2016.
•    In 1986 OPEC spare capacity was almost 20% of global product, today OPEC spare capacity is less than 2%.
•    Cuts in industry capex will prove excessive – industry cut capex by 25% in FY15. Further cuts expected in fy16, only second time in 30 years capex cut in consecutive years. Believes capex reductions will prove excessive – not 1986.
•    Significant lag between laying down rigs and production rolling over. Production peaked in June and has since dropped by 500 kbpd. USA shale/tight oil production overs over first.
•    Us production to continue to fall – EIA has reduced USA oil production forecast for FY16 from growth of 200 kbpd to a decline of 400 kbpd.
•    Rig productivity has plateaued.
•    Iran will add 300k to 400k barrels per day. Iraq will decline due to budgetary constraints.
•    Nigeria, Venezuela and Algeria at risk.
•    High geopolitical risks throughout oil producing regions.
•    Stop growth – supply declines by 8.6% per annum at existing production. 1.3MM bpd per annum has been the average or 1.4% growth in demand.
•    Thinks $70 per barrel is where it needs to be. Shale co’s said $40 break even yet they haven’t been able to generate FCF since FY10. Their supplier costs will likely rise as well particularly after consolidation.
•    2/3 E&P have negative cash flow and may be heading to bankruptcy. PXD says they need $70, EOG needs $80.

Check out the rest of the presentations from Invest For Kids Chicago 2015.