Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Saudi Aramco has Good News for Elon Musk and Oil Companies

Strangely enough, the world’s biggest unicorn; Saudi Aramco has good news for Elon Musk and oil companies.

There’s a major oil shortage coming in a few years because nobody is investing in oil exploration and production, Aramco President and CEO Amin Nasser said in a speech. An additional $1 trillion will need to be invested in oil infrastructure to maintain demand, and it is not there according to Nasser.

An oil shortage will develop in just five years because the world needs an additional 20 million barrels of oil put a day to meet demand, Nasser speculated. What’s truly scary is that this shortage might be just five years a day if Nasser’s remarks and Bloomberg’s coverage of them are accurate.

Is a Major Oil Shortage just Five Years Away?

Nasser’s remarks are certainly good news for Musk who unveiled his Tesla Model 3 on July 7. Tesla Motors (NASDAQ: TSLA) began production on the mass market vehicle and presented the first one to Musk last Friday.

“Financial investors are shying away from making much needed large investments in oil exploration, long-term development, and the related infrastructure,” Nasser complained. His argument is that massive investment in oil production will be needed to simply meet demand and it is not happening.

“Investments in smaller increments such as shale oil will just not cut it,” Nasser added. He believes that US oil shale production will not be keeping of meeting global demand.

Aramco is putting its money where Nasser’s mouth is by planning to invest $300 billion to maintain production over the next 10 years in Saudi Arabia. Interestingly enough Aramco is also betting heavily on electric cars. Its’ planning to double production of natural gas.

Since natural gas is the most common fuel for power plants a lot of it will be burned to produce juice for electric cars. Saudi Arabia is also investing heavily in solar energy.

Is it a Good Time to Invest in Oil Stocks?

Contrarian investors might be wondering if it is a good time to invest in oil stocks. The answer is maybe, these stocks are cheap and if Nasser is right there might be a shortage.

The problem is that some of the oil stocks look overvalued to me.  Chevron (NYSE: CVX) was trading at $104.29 a share on July 14, 2017, but it reported revenues of $124.34 billion in March 3017. Chevron is overvalued because ExxonMobil (NYSE: XOM) which reported revenues of $240.67 billion on March 31, 2017, was trading at $81.09 a share on July 14, 2017.

That means XOM is a value investment but Chevron is not. Both oil giants are doing a little better because their revenues are growing again. Exxon added $14.58 billion in revenue during first quarter 2017. It began the year with $226.09 billion in revenues in December 2016 that rose to $240.67 billion three months later.

Exxon is the better investment because its revenues almost twice Chevron but its’ price is almost half that of the smaller rival. ExxonMobil is certainly cheaper than other oil companies such as EOG Resources (NYSE: EOG) which reported $8.907 billion in revenues on March 31, 2017, but was trading at $91.86 a share on July 14, 2017.

Oil Stocks are overpriced

My take is that oil stocks are overpriced and will probably fall dramatically over the next few years before going back up, even if Nasser is right. This will occur because I do not see oil prices going up again until late 2019. There’s also a strong possibility that oil prices will fall again.

A major problem is that countries like Russia, Iran, Iraq, Libya and Saudi Arabia are still dumping oil on the market at low prices to pay the bills. Until that dumping ends, which will not be any time soon given those countries’ financing prices will be low.

The best time to buy oil prices might be next year if the present situation prevails. My guess is that’s when the oil stocks will hit bottom.

Electric Cars Still a Problem

A long term threat to oil companies is electric cars. They’re coming fast and not just from Tesla, Seeking Alpha contributor Anton Wahlman calculated that 143 electric vehicles are scheduled to hit the roads by 2022.

The big year for electrics will be 2022 when 115 electric models are scheduled for rollout. Although there might not be market for those vehicles the biggest electric producer; Tesla Motors (NASDAQ: TSLA) has yet to sell 100,000 cars although that might happen this year.

Still automakers think there’s going to be a demand almost every major carmaker is planning an electric. General Motors (NYSE: GMC) are planning to bring out nine electric models each. Another company Volkswagen is planning to roll out 15 models through its various subsidiaries. Daimler (Daimler (OTCPK: DDAIY) is planning to bring 10 electric vehicles not counting semi tractors.

This means that electric vehicles might start cutting into the demand for gasoline by 2022. That’s probably why Saudi Aramco is planning to planning to increase natural production. All those electric cars are going to need power and natural gas can be burned to create it.

My take is that there’s going to be a huge shakeout in oil once electric vehicles start going mainstream around 2022. Expect to see a few major oil producers and consolidation galore.

Saudi Aramco will then become a major player and be in a good position to gobble up a lot of smaller competitors if it wishes. That means Aramco might be a good stock if they ever decide to hold an IPO for it.

It looks as if an oil shortage might be cooking and a few smart investors will be well poised to cash in. My advice is stay away from oil stocks for now; but watch them closely, they’re about to bottom and become serious value investments.