Crude Inventories Drop For Seventh Straight Week

Oil prices are still having a tough time breaking out above $50 a barrel, but this week the Energy Information Administration (EIA) reported another (large) draw on crude oil inventories — the seventh straight weekly draw.

Crude inventories fell by 8.95 million barrels, which was nearly triple the 3.1 million barrel expectation from analysts. Crude oil prices barely reacted to the news, with West Texas Intermediate (WTI) hovering around $47/bbl following the release of the EIA data. The trend of falling inventories and flat to lower oil prices is unsustainable.

LNG Exports Growing Rapidly

Exports of liquefied natural gas (LNG) are surging. Last week in its second-quarter earnings call, Cheniere Energy (NYSEMKT: LNG) reported that its Sabine Pass liquefaction terminal is now the largest recipient of natural gas in the U.S. The Sabine Pass terminal currently has three trains that are liquefying and exporting natural gas, with a fourth terminal to be completed soon.

Natural gas deliveries to the Sabine Pass facility reached 2.5 billion cubic feet per day (Bcf/d) in July. That is equivalent to about 3.5% of U.S. natural gas production. These shipments are bound for destinations around the world, with many of them under long-term contracts.

As with oil prices, natural gas prices are having a hard time breaking out of a rut, but natural gas demand is growing too fast for this situation to persist.  

Did President Obama Do TransCanada A Favor?

When President Obama denied the permit to build the Keystone XL Pipeline, I mused that he might have just saved TransCanada (NYSE: TRP) billions of dollars. Many environmentalists argued that the pipeline would never actually be needed, and my response was always “So, let TransCanada take that risk. If they spend $10 billion to build the pipeline, employ a bunch of Americans in the process (even temporarily), and then the pipeline isn’t needed because the demand isn’t there — that’s TransCanada’s problem.”

President Obama denied TransCanada the ability to take that risk. So even though President Trump invited TransCanada to reapply, I thought it was a long shot that they would go through with the project because of depressed oil prices. 

TransCanada has invited customers to sign up for space on the pipeline, but reports are that the reception has been lukewarm at best. A TransCanada executive recently signaled that it was uncertain whether the project would proceed, noting that a decision would be made in November or December and that it would depend on the level of commercial support and regulatory approvals. 

Barring a surge in oil prices, I think TransCanada will end up tabling the project for now.

Another Ugly Day For Energy

This week on CNBC, Bob Pisani posed a question that I have grappled with all year. With many energy stocks trading at 52-week lows, and with an uncertain outlook for oil prices, he asked: “How do you get anyone interested in the energy story, even with stocks at new lows?”

Pisani noted:

“Energy stocks are now only about 6 percent of the weighting in the S&P 500. But the S&P is at all-time highs. If I am a big investor, if I’m a big hedge fund, or a large actively-traded mutual fund at Fidelity or Vanguard, why do I care about energy when I have tech (22 percent of the S&P) and financials (15 percent) moving?”

It’s been a tough road for energy stocks for two of the past three years. But I will bet that historically the best times to invest in any sector are exactly when the S&P 500 weightings fall to historic lows. (I bet Warren Buffett would agree).

For instance, the last time the energy sector was weighted at 6% of the S&P 500 was 2002-2003, which preceded a bull market in energy that would see the weighting more than double in just three years. I don’t believe a rapid doubling is in the cards this time, but I do believe the time for long-term investors to accumulate shares is when historical weightings are low.

There are exceptions to that rule. For example, an industry that looks to be in permanent decline would be a definite exception. However, those who think the oil industry is in terminal decline should take note that not only does oil demand continue to rise, but just last month the International Energy Agency (IEA) said that oil demand is accelerating.

Again, low prices can coexist with rapidly growing demand for only so long.

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