Toward the end of each year, analysts and market watchers make bold predictions about what they believe will transpire over the next 12 months. More often than not, these are "set and forget" proclamations since few prognosticators go back and review them for accuracy at the end of the year.
I, on the other hand, have found value in reviewing my prior predictions. That's because we can learn quite a bit from mistakes, which are quite common when making predictions. With that in mind, here's a look back at my three bold oil market predictions from 2019.
Bold prediction No. 1: "Oil supplies tighten faster than expected, sending crude back into the $80s"
The price of oil torpedoed at the end of 2018. The global oil benchmark, Brent, plunge from a peak of more than $85 a barrel in early October to right around $50 a barrel by the end of the year. The main factor weighing on the price of oil was that the Trump administration backed away from its promise to impose powerful tariffs on Iranian oil exports by granting waivers to several key buyers at the last minute. As a result, the industry had too much supply by the end of the year.
I, however, believed that oil producers would quickly correct this issue. That's because OPEC had already agreed to reduce its output again. Furthermore, Canada required its producers to trim supplies to help ease that country's pipeline problems. So I thought crude prices could rally sharply in 2019, especially if a supply outage hit a major oil-producing nation.
While I was right that a supply shock would strike the market and send crude prices higher, they didn't quite reach as high as I thought, as Brent topped out just below $75 a barrel in May. The issue holding crude oil back was that demand didn't grow as much as expected because the trade war between the U.S. and China weighed on economic growth. While I got close, 2019 wasn't quite the bounce-back year for the oil market I initially expected.
Bold prediction No. 2: "Midstream stocks deliver market-smashing returns"
The slump in oil prices at the end of 2018 hit energy stocks hard, causing the entire sector to lose value that year. Midstream companies also took it on the chin, as the average one in the Alerian Energy Infrastructure ETF lost more than 20% of its value that year even though most generate stable revenue from long-term fee-based contracts.
I therefore thought midstream stocks would bounce back big time in 2019 as the oil market found its footing. Adding to my optimism was that several pipeline companies expected to finish large-scale projects that would provide a significant boost to their cash flow. I pointed out that oil pipeline giant Plains All American (NYSE:PAA) was on track to generate $2.8 billion in earnings, 10% more than 2018, and 20% above its peak during the oil market's boom years.
On one hand, I was right, as midstream stocks did rebound in 2019. Through mid-December, the Alerian Energy Infrastructure ETF has generated a 16.5% total return. However, that has fallen well short of the red-hot S&P 500, which has gained nearly 29% on the year. Meanwhile, Plains All American didn't generate the big-time total returns I anticipated. Despite being on track to grow earnings at a faster-than-expected rate of 14.6%, the pipeline company has produced a negative total return of 6%. The issue that still seems to be holding the sector back is that it's fallen deeply out of favor with investors because of all the volatility in recent years.
Bold prediction No. 3: "The Permian takes a back seat to these legacy shale plays"
The Permian Basin has been all the rage in recent years, as oil and gas companies have poured billions of dollars into the region. They've drilled so many new wells that production had outpaced the region's pipeline capacity.
I therefore thought activity in the region would slow down this year, with drillers pivoting to other plays like the Eagle Ford and Bakken. That seemed to be the case toward the end of 2018, as M&A activity in the Eagle Ford started heating up when both Chesapeake Energy (OTC:CHKA.Q) and Denbury Resources (NYSE:DNR) unveiled bold acquisitions in that region. Unfortunately, those deals didn't pay off. Chesapeake's transaction added more stress to its weak financial profile, while Denbury's financial troubles caused it to walk away from its merger. Meanwhile, most other drillers cut back on their activity level last year instead of shifting to other regions. So while I was right that the Permian would slow down, that didn't cause a major revival in legacy shale plays.
Being partially right was still wrong
I was technically correct directionally on all three of my bold predictions this year. However, none panned out as well as I had expected. The main issue boiled down to the fact that sentiment in the sector remained negative even though oil prices rebounded sharply. That kept a lid on midstream stock prices as well as drilling budgets. The lesson learned here is that negativity can continue weighing on a sector even if the fundamentals suggest that things have improved.