This is the Only Consistency in Oil Stocks
Crude Realities of a Nantucket Sleighride
It’s All About Technology
Making money has rarely been easy for oil investors. While there have been some glorious periods in the stock market when oil stocks worked like a charm—the most recent periods from 2003 to 2008 and 2010 to 2014 come to mind—the sad reality is that corrections have wiped out a good portion of the gains for all but the highest quality oil stocks.
The pattern isn’t unique to crude oil. Pull up charts of natural gas, coal, nuclear and solar stocks and you’ll see the same thing. The challenge, of course, is that prices of most energy-related commodities are incredibly volatile. And a producer can only absorb so much of the pricing fluctuations through capacity increases, production growth and efficiency gains.
Perhaps the only consistency in the oil market is a lack thereof. The repeating pattern of boom and bust has played out over and over again, regardless of time and place. Oil stocks from the U.S. to Africa to the Middle East to the South Pacific do the same thing. Predicting when and how long each cycle lasts is impossible. But that doesn’t stop investors from trying! The potential gains from the booms are just too juicy.
As the 20-year chart of crude oil price below shows, the current oil correction means we’re looking at a price that takes us back to the 2009 low of around $37.75. The commodity is down 65% over the past 18 months, and a full 75% since its 2008 high of $147.00 a barrel. While the long, long-term trend is still up, the many variables influencing the markets are, once again, proving that you need to have pretty thick skin to make it as an oil investor.
Crude Realities of a Nantucket Sleighride
Thick skinned oil investors are part of U.S. history, especially in coastal areas of the northeast and northwest. A couple of weeks ago, I took a road trip with my son to brush up on my knowledge of one particular period of U.S. oil production. But we didn’t set out to look at old oil rigs. We were looking further back in history to the first form of offshore oil exploration—whale hunting.
Whale hunting was the first international industry that the U.S. dominated. The country’s whale oil “lit and lubricated the world.” And there’s no better place to learn about it than the Whaling Museum in New Bedford, Massachusetts, which is less than an hour drive from our home in Rhode Island. I wanted to see if there were any oil investing lessons to be gleaned from the rise and fall of the American whaling industry that could be applied today. There are.
The town of New Bedford sits on the Acushnet River, which drains into Buzzards Bay. Back in the heyday of American whaling in the mid-1800s, New Bedford boasted the highest income per capita in the country. One of the reasons it became such a powerful whaling city was the invention of a new technology that made whale hunting more efficient. New Bedford resident Lewis Temple came up with the toggling harpoon which featured an incremental improvement to the previous design—a two-part point that was virtually impossible to pull out of the animal while bringing it back to ship or shore.
Once harpooned, a whale tries to flee, dragging the boat along as he goes at speeds up to 23 mph. This bumpy ride became known as the Nantucket sleighride, and could last for hours before a whale ran out of energy. The toggling harpoon, along with a deep harbor and plethora of talented shipbuilders, helped New Bedford grow into one of dominant whaling ports in the world. Its whaling fleet grew from 36 ships in 1820 to 329 in 1857, at which point the fleet was worth more than $12 million!
These boats were the oil rigs of the day, and production rose and fell depending on the potential out at sea. In the same type of pattern that we see play out over and over again in the “modern” oil market, the promise of untold riches spurred many men and many towns to try and jump on the bandwagon. Of course, without the right knowhow, equipment and infrastructure, most of these new enterprises ended in heartache.
It’s All About Technology
The U.S. whaling industry headed into decline for three reasons. The Civil War resulted in the sinking of dozens of whaling ships, both in battle and in intentional efforts to block shipping routes. Two Arctic whaling disasters between 1871 and 1876, in which 45 ships and millions of dollars were lost, didn’t help sell the industry as one with a promising future for able-bodied men—especially as opportunities in gold exploration and manufacturing seemed both more promising and less dangerous.
But the main reason for the decline of the American whaling industry was one which, broadly speaking, continues to dramatically impact global oil markets today. I’m talking about advances in disruptive technologies.
The specifics change over time, but the story line remains much the same—technology reshapes entire industries. Had it not been for the toggling harpoon, New Bedford might not have become the wealthiest city in the country. Had it not been for deep sea oil drilling technologies, massive reservoirs in the Gulf of Mexico, offshore Africa and the North Sea would not have been discovered. And without advances in horizontal drilling and fracking, U.S. onshore production wouldn’t have led to the current glut of oil sloshing about the globe.
American whaling declined mainly because Norwegian whaling technologies, led by Svend Foyn, made whale hunting far more economical than anything achieved by American whaling ships. The Norwegians developed mechanized chaser boats that had high-powered harpoon cannons capable of firing heavy-caliber, explosive harpoons. Not only could these high-tech whaling vessels harvest far more whales far more quickly, they also expanded the market, so to speak, to new species that had previously been out of range.
There was no way American hand-whalers could compete. And to re-tool their aging whaling fleets didn’t make sense given emerging opportunities in manufacturing, petroleum oil exploration and gold exploration.
The punchline here is that oil markets have always been, and will always be, extremely volatile. Power will shift from country to country. The mighty can fall. Locations that produced before won’t necessarily produce again. And technology will always, always, always, change the game.
Energy investors need to be agile. And they must keep an eye on the next round of disruptive technologies. It can be a dicey game uncovering the next big thing, but it can also be extremely rewarding, and incredibly profitable. You just don’t want to make the mistake of forgetting that a better technology lies around the corner. If you find yourself forgetting, head to New Bedford—where median household income today is $36,789, just 53% of the state median.
In Cabot Small-Cap Confidential, uncovering disruptive technologies in all variety of industries, including oil exploration and production, is the name of the game. We don’t often open the doors to this limited circulation advisory service, but we’ll be doing so in just a couple of weeks. Keep an eye out for your invitation. I have a long list of game-changing technology stocks that are poised to revolutionize their industries, and I’d love the opportunity to share them with you.
Chief Analyst, Cabot Small-Cap Confidential