Miller/Howard Investments
Miller/Howard Podcast Series
Part 2: 2018 Crude Oil Outlook
Michael Roomberg, Portfolio Manager/Research Analyst  |  Full Bio (PDF)
Part 1: 2018 Energy Outlook
Part 2: 2018 Crude Oil Outlook
Part 3: 2018 Natural Gas Outlook


Hello, this is Michael Roomberg, Portfolio Manager and Analyst at Miller/Howard Investments.

On the Crude Oil Macro…
OPEC continues to demonstrate record compliance with its production cut agreement. The agreement targets reducing global oil inventories to their long term average of about 28 days’ worth of inventory on hand. These supplies had ballooned to about 33 days’ worth of supply, around the world. Inventories have since declined, due in part to these production cuts, from OPEC to about 30 days worth of supply. If OPEC continues to adhere to the agreement—and we believe that they will—we think there will be considerable support for prices, provided that the global economy remains firm.

Recent developments in Saudi Arabia underscore the ticking clock that motivates much of the Kingdom’s current policies. The new Crown Prince is attempting to liberalize society, reduce state subsidies, and reduce the influence of religious extremism, while fighting a war in Yemen against Iranian proxies. Saudi Arabia began with a $750 billion rainy day fund in 2014, a number that has now fallen to below $450 billion this year, due to low oil prices. Even with higher oil prices in 2018, Saudi expects to burn about $50 billion more than the revenue it will bring in this year, which will mainly come from the sale of crude oil. Based on our estimates, if oil were to decline again to the recent lows of $26/bbl, we estimate that, without drastic fiscal changes, the country of Saudi Arabia could run out of all cash reserves in 24 months. Simply put, the Kingdom is in a highly precarious state, where US shale can bring on crushing volume additions below $60/bbl, and Saudi can ill-afford another price war. With 95% of Saudi revenue derived from the sale of crude oil, a 50% decline in crude oil prices would simply devastate Saudi finances.

To sum up our long term view on oil—in contrast to natural gas, where we see incredible long term demand growth—we don’t see much oil demand growth beyond 10 years from today. Instead, we see North America emerging as one of the few cheap and secure sources of global oil supply in a world that could face increased volatility in critical oil supply regions. Shale oil’s appeal is from the supply side, less so the demand side, though both impact price, and can be very attractive basis for investment.


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