My TFSA Update May 2018

Last update on June 18, 2018.

Image Credit: kovop58 / Shutterstock.com

 

In this series, I (Jin Choi) talk about my goal of reaching $1 million in my TFSA account by 2033. If you want to know what a TFSA is, I recommend you read my free book.

May Results: Up 5.8%

At the end of May, I had $65,120 in my TFSA account, which was up by 5.8% since the start of the month. By comparison, the Canadian stock market went up by 3.1% while the U.S. stock market went up by 3.3% in Canadian dollar terms. Therefore, my portfolio outperformed the broader market.

The majority of my portfolio consists of oil and gas stocks. In May, oil prices fell from $68.56/bbl to $66.98 (in US dollars), but despite that fall, my oil stocks went up.

There are a couple of reasons I think oil stocks performed well. One, the Canadian federal government bought the controversial Trans Mountain pipeline from Kinder Morgan. The purchase makes it more likely that the pipeline expansion will proceed, which should allow Canadian oil companies to receive higher prices for their oil in the long term.

Two, I think investors’ expectations of long term oil prices are still increasing. While many oil analysts are still valuing oil companies based on long term prices of below $60/barrel, that’s changing. As you’ll know from reading my blog, an oil company’s value changes significantly if one assumes a price of $65/barrel versus less than $60/barrel.

The big question therefore is whether oil will stay above $60/barrel, or crash below it. Personally, I don’t see it crashing, barring a global recession.

The latest OPEC and IEA reports show that the world is still running a supply deficit of close to 0.5 million barrels/day. If prices were to crash, the deficit would first have to turn into an oversupply. If you read the news surrounding oil, there are two factors that could presumably make that happen: increases in Saudi Arabian production, and increases in shale production. But it’s hard to see either being significant enough to turn the deficit into an oversupply.

First, let’s talk about the Saudi production. During the first four months of this year, Saudi Arabia produced roughly 9.9 million barrels/day. After the US cancelled its nuclear deal with Iran, Saudi Arabia pledged to offset any lost Iranian oil production, which some estimate will be around 200,000 barrels/day. That means Saudi Arabia can produce 10.1 million barrels/day without having an impact on the global oil supply.

Many people believe that Saudi Arabia can’t produce much more than 10.1 million barrels/day for very long. For example, David Demshur, who runs a large US oil services company, said that Saudi Arabia shouldn’t produce 10.5 million barrels/day because doing so would damage their oil reservoirs. Assuming this is true, Saudi Arabia can at most produce 10.5 million barrels/day and thereby reduce the global supply deficit by 0.4 million barrels/day.

Shale oil producers, on the other hand, are not under the same constraints as the Saudis. Indeed, shale oil producers have been ramping up production more quickly than many people expected, rising by over 100,000 barrels/day each month so far this year.

However, shale oil producers are now bumping up against their own logistical constraints. For example, there doesn’t appear to be enough pipeline capacity connecting the Permian basin, which is the most prolific shale oil basin, to oil refineries. Although pipelines are currently under construction, they won’t come online until the second half of 2019. Without those pipelines, it will be difficult for shale oil production to increase significantly.

In the meantime, demand for oil will soon jump by close to 1 million barrels/day for seasonal reasons (US driving season, Middle Eastern electricity demand, etc.). So any production increases coming out of Saudi Arabia and the US will be swallowed up by the increases in demand.

So in summary, I don’t see how the current oil supply situation could swing from a deficit to an oversupply over the next year through increases in production. This is also the position taken by Pierre Andurand, who has an incredible track record in predicting oil prices.

I believe that only a reduction in oil demand, through a global recession, could cause an oversupply. Until I see a realistic potential for an oversupply, my plan is to continue to hold my oil stocks.

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