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Batting Almost .800 for 2016

By Robert Rapier on December 29, 2016

 

Almost a year ago I made my 2016 energy predictions (see “A Happier New Year for Energy.”) I have been making annual predictions for nearly a decade now, primarily as a framework for sharing my views on energy markets in the coming year. I try to make predictions that are specific, measurable and actionable. I prefer not to leave anything open to interpretation or spin. With few exceptions, at the end of the year a prediction is right or it is wrong.

I try not to make “no-brainer” predictions. When I make these calls, there is a fair level of uncertainty around them.

Although I had one high-profile miss this year, the others were mostly correct. Here they are, along with commentary on each.

1. U.S. oil production will suffer an annual decline for the first time in eight years

This was the closest to a “no-brainer” of any of my predictions. When I made it, I indicated that I had the highest confidence level that this one would come true. In fact, oil production started to decline in 2015 (even though 2015 annual production was still above the 2014 total), and the only thing that I thought would have turned it around was an early 2016 surge in oil prices.

Instead, oil prices weakened further in the first quarter, and the production decline that began in April 2015 continued throughout 2016. Between January and September of this year production fell by more than 600,000 barrels per day (bpd). Since September, production has trended back up, but is still well below the 2015 average of 9.4 million bpd. Final numbers won’t be released by the Energy Information Administration (EIA) for a couple of months, but based on monthly data through September and the weekly reports released by the EIA, 2016 oil production is going to come in at about 8.8 million bpd. So this prediction was totally correct.

2. The closing price of the front month West Texas Intermediate (WTI) crude contract will reach $60/bbl in 2016.

I noted when I made this prediction that it was extremely aggressive. When I made the prediction the front month contract for WTI traded at $36.14/bbl, and no front month contract during 2016 traded above $43.73/bbl. Thus, this prediction would require a gain of 66% to be correct.

Given the aggressive forecast, I also said up front that I would grade this prediction on a curve, and would only consider it a failure if WTI failed to crack $50/bbl. I am writing this with a couple of trading sessions left in the year, and WTI is around $54/bbl, and has traded up to $54.51. It seems unlikely that it will reach $60, but has risen about 50% since I made that prediction. Not a perfect prediction, but directionally right. If you made a bet on rising crude prices, you won that bet.

Call this one mostly correct.

3. U.S. natural gas production will suffer an annual decline for the first time in 11 years

While U.S. natural gas production set another record in 2015 — the 10th straight annual increase — my reasoning was that low prices would finally dent output. A number of people challenged this prediction, with some assuring me I was underestimating the resilience of the Marcellus shale. I wasn’t.

So what happened? Production stayed above the year-ago levels until March, but since then has been down year-over-year every month. Production in 2015 was a record 74.1 billion cubic feet per day (Bcf/d). Through September, that has fallen to 72.9 Bcf/d. By early December, the weekly numbers had fallen to below 72 Bcf/d, so 2016 natural gas production will indeed be below 2015’s record, snapping a 10-year streak of gains. This has also helped natural gas prices recover from the lows of earlier in the year.  

This one was completely correct.   

4. The Energy Select Sector SPDR ETF (XLE) will rise at least 15% in 2016.

The Energy Select Sector SPDR ETF (NYSE: XLE) represents the largest energy companies in the S&P 500. Its top holdings include supermajors like ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), and large shale oil producers like EOG Resources (NYSE: EOG) and ConocoPhillips (NYSE: COP). It is a good index for conservative investors of large-cap energy companies.

When I made this prediction I noted that fundamentals would ultimately win out, and that the energy sector’s prospects should start to improve before the end of 2016. Indeed they did. Rising oil and gas prices helped the XLE rise by 15% by mid-year, and as I write this the index is up 27% on the year. I full expect more gains in 2017.

This one was completely correct.         

5. Hillary Clinton will win the 2016 presidential election.

Sometimes the reasoning behind a prediction turns out to be as important as the prediction itself. It is possible to get a prediction wrong, but the logic behind the prediction helps to inform decisions about the market.

That was not the case here.

My reasoning was that Clinton would beat Sanders in the Democratic primaries, which she did. And that the Republican nominee would have enough negatives to end up outpolled. Ironically, that also came true as Clinton won the popular vote by nearly 3 million votes. But we don’t elect on the basis of popular vote.

Still, I believe (as polling guru Nate Silver has also attested) that Clinton would almost certainly have won had FBI Director James Comey not put his thumb on the scale 10 days before the election. There were a number of factors leading to her loss, but that one was huge. Her poll numbers dropped steeply just before the election and never recovered. I can rationalize that my instincts on this were mostly correct, but were likely undone by an unprecedented move by the FBI director.

But none of that matters. This is a binary prediction, either right or wrong. There is no “almost” in such a prediction. What matters is that the purpose of the prediction was to predict energy policy, and getting it wrong means that energy policies are going to go in a different direction than I expected. At the end of the day, all that mattered was that it was wrong. The biggest challenge now is pivoting in response to the expected energy policies of Donald Trump.

So even though I believe the logic of the prediction was entirely defensible, this one was 100% wrong.        

Conclusions

Despite the high-profile miss on the presidential election, my instincts proved to be completely or mostly right on the other four predictions. If you bet on rising crude prices and a recovery in the oil and gas sector, you probably made money.

My plan for next week is to highlight some of the best performers in the broader energy markets, and more specifically in the MLP sector. Following that I will offer up my predictions for 2017.

In January we will also review our recent portfolio picks for Energy Strategist and MLP Profits. Consider subscribing for actionable advice that will help you profit in the energy sector in 2017.    

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

 


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