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Oil Indicator

Petro-States Face Extinction

Petro-states urgently need to begin diversifying their economies, shifting away from oil production, or else they face financial risks in the years ahead. 

That conclusion comes from the IEA’s new report, “Outlook for Producer Economies,” which warns that a changing energy system threatens the economies of oil-producing countries. The threat comes in multiple forms, both on the supply side and on the demand side. 

Energy efficiency, electric vehicles and other technological changes raise questions about peak demand. Climate regulation also threatens to destroy consumption. On the supply side, U.S. shale could capture a bulk of any demand increase that might have otherwise been met by other oil producers.

These factors pose serious threats to major oil producers, and the IEA focused on six countries: Iraq, Nigeria, Russia, Saudi Arabia, the UAE and Venezuela. All of those countries are significant oil producers and are overwhelmingly dependent on oil revenues to finance their budgets.

DYI:  I’m not going as far as the author of the article suggests in forecasting oil/gas producing countries early demise due do demand destruction.  Socialism/communism has produced wildly unsustainable welfare state budgets has dropped these countries to their knees [except Russia/UAE].  I do agree these countries need to diversify their economies to deal with the normal price vacillations for oil and gas.  That would simply be good common sense which is in short supply among the names of the countries listed in the article.  Plus these countries are massively corrupt – THIEVES – who steal today and never think about the long term consequences.

Oil and Gas are in a Secular Bull Market 

The last major find for oil and gas goes all the way back to 1957 in Alaska and North Sea find dating back to 1969.  Since then there have been other discoveries but nothing compared to any of its previous finds.  What has been happening is existing finds have had their life extended due to new technologies such as horizontal drilling and of course fracking.  Needless to say the days of sticking a straw in the ground and out comes the bubbling crude is long gone.  Finding additional supplies is far more difficult.  It is either drilling in deep water; or in extreme Arctic cold weather. This reduced supply produces higher prices in an extreme roller coaster fashion.

Oil as of 10/30/18

$66.59

The Chart above is very instructive as to the roller coaster for oil prices and its cousin gas prices. The first discovery of oil goes to Edwin L. Drake in Titusville, Pennsylvania on August 28, 1859 drilling down 69 feet.  And as the expression goes – the rest is history – during the early days of easy oil finds all over the U.S. and eventually the world played out in 1973.  Oil prices leaped as OPEC squeezed supply driving prices higher.  This put the Alaskan and North Sea oil into high gear with a massive build out with pipelines and super tanker ships thus once again driving oil down to a second bottom in 1998.  That marks the end of easy to find and deliver oil and gas to market.

Supply – Burgeoning Countries – Efficiency – Alternative Energy

The days of easy to find oil has long since gone a world wide dynamic of burgeoning countries of Asia with 4.5 billion people all who want a piece of the good life; which is delivered by fossil fuels.  This goes without saying a major demand push from Asia has pushed up the price of crude [despite fracker's short term drop in 2016].  Higher the price clever engineers dream up more and more ways of using less oil/gas delivering the same standard of living AND the creation of alternative energy such as wind, solar, tidal wave etc.  So far those desiring a better life are demanding more than the engineers are able to use more efficiently or creation of alternatives.  Until technology overwhelms demand fossil fuels will remain in a roller coaster bull market.  In DYI’s opinion the world price of oil/gas remains in a secular bull market.

 DYI’s Oil Indicator 

 10/1/18

Updated Monthly

Oil Prices: 
10/01/13....$105.65

09/28/18......$81.71   

Down 23%(rounded)
(oil prices approximately five years earlier due to weekends & holidays)
ANS West Coast prices   

 OIL INDICATOR:  Positive  Oil indicator will remain positive until it's rise is greater than 75% from five years earlier.

Oil prices are well known for their volatility in the short term, longer term due to dwindling reserves energy prices are in a secular bull market.  Technologies such as fracking will extend the life of oil fields but major new discoveries arrive at a snails pace far slower than the world's growth.  

As long as prices rise in a slow and orderly pace our economy can adjust to those changes, however if prices spike (international tensions, war etc.) high energy costs behave as a massive deflationary tax. This will send our economy tumbling down and very possibly the U.S. stock market.

If oil prices rise greater than 75% from five years earlier, investors at that time should shift their portfolio geared towards deflationary times.  This would be an oil indicator as negative.

If oil prices rise from five years earlier less than 10% or drop then the inflationary play is in effect; a positive for economic growth along with possible higher stock prices.

Where to find five year earlier oil prices?  Alaska Department of Revenue    

Oil indicator positive                 
  5%  High-Yield Corporate Bonds
10%  REIT's
10%  Energy
10%  P.M.'s
65%  Small Caps
  0%  Lt. Gov't Bonds

Oil indicator negative
  5%  REIT's
10%  Energy
10%  P.M's
10%  Small Caps
65%  Lt. Gov't Bonds

Vanguard Funds

REIT's
REIT Index Admiral  VGSLX

Energy
Energy Fund  VGENX

Precious Metals (P.M.'s)
Global Capital Cycles  VGPMX

Small Caps
Small Cap Value Index Admiral  VSIAX

High-Yield Corporate Bonds
High-Yield Corporate Bond Fund VWEHX

Long Term Government Bonds
Long-Term Government Bond Index Admiral  VLGSX

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PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.     

  DYI