For the last few years and for the next few years, investors should not be surprised by the only relevant word in the energy sector, “supply.”
Energy Demand Has Been Stabilized.
The prolonged depressed energy prices across the board simply reflect the lack of strong economic demand, signifying by the Chinese slowdown in summer 2015. Even long before then, oil prices have been mainly affected by the intentional over-supply from the OPEC, and most recently, from the non-OPEC producers. As politicians can often talk up the financial markets temporarily, nobody can talk up the economy. The rest of the world has long accepted the fact of a sluggish global economy for the past few years. Pretty soon, the U.S. will come to the grip that the US economy will not grow at 4-5% annually in next 4 years. In other words, the global energy demand has been already settled.
Only Supply Can Be Increased or Substituted.
So, the only remaining game in town is to affect the supply of the energy by increasing the market share. Under this premise, domestic oil output is expected to increase to an average of 9.7 million barrels per day next year led by increased drilling in the Permian shale region of Texas and New Mexico and from rising production in the Gulf of Mexico, breaking the U.S. total annual production record set back in 1970. With rising crude oil production from other non-OPEC countries, it is expected to curb upward pressure on oil prices for much of 2017. By 2018, U.S. crude oil production is expected to reach an all-time high.
While the total pie cannot be enlarged without a limit, “alternatively,” the expansion strategy is to convert the conventional energy use to alternative energy use.
While this winter’s warm weather is cutting into U.S. natural gas demand, with natural gas consumption during February expected to be the lowest for the month in eight years. Lower natural gas demand and above-average gas inventories are putting downward pressure on U.S. natural gas prices, as the average spot price for natural gas is expected to be down 12% for 2017. Even under this difficult situation, many well-wishers believe that the U.S. could become an even bigger producer of natural gas, a “game changer” for the U.S. and globally if President Trump’s push for pipeline development succeeds and gas is brought to new markets. The intention is to let US produced gas become an alternative to coal in Asia and to Russian pipeline gas in Europe. Further support to this thesis comes from the fact that the U.S. already is an exporter of natural gas with Cheniere Energy’s liquefied natural gas shipments out of the Sabine Pass in Louisiana, and with pipeline gas shipments to Mexico.
If you buy in the above investment thesis, you should like Cheniere Energy (LNG), and Exxon Mobil’s recently announced $20 Billion spending program for the U.S. Gulf coast which includes 11 projects that will create new demand for gas. In addition, we also like William’s Co and Chesapeake for the same reasons. While both companies have planned for prolonged low gas prices, both also worked to bring down debt but at the same time brought down costs and raised production.
The other alternative of the alternative energy policy is coal. While U.S. total electricity generation is expected to decline about 1% this year, the share of coal-fired generation is forecast to increase. After declining for two years in a row, U.S. coal production is set to increase 4% during 2017. In fact, within the energy sector, the 27 companies in the coal industry had the largest performance of over 90% in the past 12 months. If you like the coal mining story, you should like the YTD performance of Alliance Holding, L&L Energy, Natural Resources, Yanzhou Coal Mining, and Rhino Resources Partners.