Some Perspective On Oil

Long-time readers know my bullish views toward the energy sector. In the past, I’ve counselled against using weekly inventory numbers in considering long-term investments in the space and today’s bullish inventory numbers, while propelling a nice rally in the energy names, is no different. The case for energy scarcity does not pivot on how much oil is stored in Cushing, OK but rather the inherent difficulty in extracting energy even in the face of rising prices (i.e. rising prices lead to overcapacity, not undercapacity, yet oil companies are struggling to find new cost-effective reserves).

I will not belabor the points made in many other posts but in all the noise regarding oil prices and supply, I found this interesting tidbit in a Financial Times article about oil tankers:

However, owners [of oil tankers] and market analysts remain far more bullish about the sector’s prospects than their counterparts in depressed dry bulk and container shipping. Oil demand has fallen only about 1.5 per cent because of the world recession…

So despite a worldwide recession in which the largest energy consumer (U.S.) is contracting at an annualized 6+%, oil demand has dropped 1.5%. Yes, prices are set at the margin but that misses the bigger point of how inelastic oil (and energy) supplies are.  And yet, capital expenditures in the industry are being cut by all but the very biggest companies. How can the economy grow if problems develop in the energy sector?

A post from ZeroHedge postulates on some of the possible consequences of this dynamic.

As always, YMMV.

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