Taal selectie


Shale is the name of the game

The oil price (WTI) dropped 5.9% in August, closing the month at USD 55.10 per barrel. The XOP index of US shale oil & gas producers fell 13.8%, while our selection of stocks was down 21.4%. All the alpha created over (more than) two years was thus lost in just the stoke of a pen.

CrudeStocksSource : Bloomberg

It appears that the remaining investors in the energy space threw in the towel last month, when the Chinese government announced retaliatory measures against the import duties on Chinese goods that had just been instated, or increased, by President Trump. Its intention to impose a 5% tax on oil imports from the US came as a big surprise, knowing that Chinese refineries will be needing US oil in a not so distant future in order to satisfy their ever-growing demand for sweet crude.

The possible consequences of the escalating trade war (which remain very much guesswork) have clearly blinded the investment community from the fact that substantially lower than expected production growth (alongside continued OPEC+ discipline) is offsetting the somewhat disappointing demand. Yet, this production shortfall is obvious in the sharp drop in US oil inventories since June (see graph). Sooner or later the gap will have to also show up in the price of oil. But, so long as some disposable inventories remain, crude may well continue to be driven by sentiment rather than reason.

Following the publication of shale companies’ second quarter results (more or less in line with market expectations), we were convinced that the worst was behind and that smaller, more leveraged companies would outperform shale oil majors in a upward-trending market. Unfortunately, due to the new round of trade sanctions, exactly the reverse occurred. Further patience will thus be required. That said, shale stocks have now become so inexplicably cheap that major oil companies can be expected to move into the segment, with takeover offers. This might (finally) serve as the trigger for a long-awaited stock price re-rating.

(Update : 09.2019)

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