What to make of it all in 2016?

FRISCO, Texas - Jan. 8, 2016 - PRLog -- What a start to 2016, though seemingly not too good of one… China’s market is leading all others down on continued concerns about their economy’s weakness and the world has a terrible situation in the middle-east that’s getting even worse and spreading globally. Add to that the realization this week that some of the Fed governors weren’t too sure about raising rates, our strong dollar and the fact that the oil markets are dragging down several areas within our domestic and global economies, and it makes for a challenging backdrop for the start of the year.

So what to make of it all? I’ve not been too keen on those who believe they can foretell events. Some meteorologists or market forecasters are better than others, but they generally they miss the mark more often than not. What I have found over the last twenty years is that there is certainly an ebb and flow to the markets, also known as volatility. Some are short term and others are longer. Just when the real estate market couldn’t be any better, it crashed in 2008. Or as in March of 2009, when it looked terrible for the stock markets, they took off on a 6 year run. Buy low sell high is an adage driven by volatility.

There are few markets as cyclical or volatile as that of oil and gas. Take a look at the history of crude prices in the chart.

The chart above reflects the historical volatility of oil we’ve seen since the 1800’s. In particular, look at the movement since the 70’s. I’ve added a splatter mark representing a ballpark orientation of where oil has gone since this chart was published in December 2014. As I’m writing this, oil is now trading below $35 per barrel, roughly 65% off the 2014 high. The red horizontal line helps to give some sense of where we are on a relative basis, with it being roughly eleven years since we’ve seen current prices.

This significant drop has many contributing factors, not least of which is the U.S. shale boom. Our country’s technological advances in on-shore shale production have added over 4 million barrels of oil a day to our domestic production and continue to surprise the global markets with ever increasing efficiencies. The U.S. shale revolution has driven a historically fundamental change in our standing among the world’s oil producing countries. The full impact of which is still unknown, but consider these facts… For the first time in forty years we are now exporting crude oil. OPEC is dysfunctional at best and likely a thing of the past. And, with shale production, the U.S. can be the swing producer driving the markets with our ability to add millions of barrels of production in a relatively short period of time. It once took years for projects large enough to make an impact to come online. Now, we can add a million barrels a day in just months. Truly a game changer.

So what do we make of it all? Without making predictions one can certainly make some simple observations. For one, oil is on the lower side of recent historical pricing, and we believe that bodes well for acquisitions in 2016. We’re not alone. There’s an estimated $56 billion on the sidelines in energy related private equity funds waiting to pounce. We mentioned in our August blog that it was time to start paying attention to potential opportunities. We’re still very much of the opinion that these next couple of years will present exceptional opportunities to buy assets in the oil patch. As for all of the other concerns…well, here’s hoping for a Happy, Healthy, Peaceful and PROSPEROUS 2016!

All the best,

Mark T. Mersman
President