Lance Roberts

About the Author Lance Roberts

As an active portfolio manager for STA Wealth Management, Lance's primary role is to question the mainstream mantra. Rather than just regurgitating the news of the day, Lance looks at the “raw data” to bring a unique and “un-spun” perspective to the conversation. Lance's deep understanding of fundamental, technical and economic perspectives, combined with his unique focus, helps listeners understand how it impacts their family, their money and their life. "When a portfolio is fully invested, studying the reasons why the market will continue to rise is a bit pointless. As investors, we need to temper our bullish perspective with contradictory arguments to reduce 'confirmation bias.' If our job as investors is to 'buy low and sell high' we need analysis that helps us to identify those points." After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much "been there and done that" at one point or another. His common sense approach, clear explanations and “real world” experience has appealed to audiences for over a decade. Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to your money and life. He is also writes a daily blog which is read by thousands nationwide from individuals to professionals, and his opinions are frequently sought after by major media sources. Lance’s investment strategies and knowledge have been featured on CNBC, Fox Business News, Business News Network and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, Bloomberg, The New York Times, The Washington Post all the way to His writings and research have also been featured on several of the nation's biggest financial blog sites such as the Pragmatic Capitalist, Credit Writedowns, The Daily Beast, Zero Hedge and Seeking Alpha.

Oil Supply-Demand Suggests Pain Not Over Yet

If you have been reading my commentaries for very long, you are already aware that I live in Houston, Texas which is the energy capital of the world. While the Houston economy has transformed since the “oil bust” in the 80’s, do not be misled about the importance of energy as a critical support of the Houston economy.

Beginning in late 2013, I begin discussing on my daily radio show that it was likely time to begin evaluating energy based holdings and reducing some of the related risks. The reasoning then was simple: everything cycles. Therefore, as the adage goes, it was important to “make hay while the sun shines.” 

As you can imagine, I was vilified for making such an outlandish commentary. I received literally hundreds of emails explaining the “new paradigm” in energy due to the “fracking revolution.”  That emerging markets, primarily China, would continue to drive the demand for oil/energy for decades to come. It was all the usual arguments for why “this time is different.”

Over the next couple of months, as I watched commercial/apartment/multi-use real estate explosed in Houston, I became even more committed to my call that “something wicked this way comes” for the oil patch. With fully 1/6th of all commercial properties in the United States being built in Houston, it was easy to see the excesses building in the system all driven by the energy boom.


In the June 2014 weekly newsletter, I made my first written call with respect to energy-related holdings as follows:

“In early May I set a target for oil prices at $106. That target has now been reached. With oil prices extremely overbought, now is a good time to profits in energy-related stocks. This is particularly the case in operators and drillers that are directly impacted by changes in oil prices.”

However, the most important warning came in early August of 2014.

“While oil prices have surged this year on the back of geopolitical concerns, the performance of energy stocks has far outpaced the underlying commodity. The deviation between energy and the price of oil is at very dangerous levels. Valuations in this sector are also grossly extended from long-term norms.

If oil prices break below the consolidation channel OR a more severe correction in the markets occurs, the overweighting of energy in portfolios could lead to excessive capital destruction.”


I have also suggested on multiple occasions, despite mainstream analysis that MLP’s were a “safe alternative” to investing in oil, such would not be the case when the correction in energy started. To wit (June 2014):

The same goes for ‘dividend’ plays such as close end funds, MLP’s and REIT’s which are all heavily leveraged. Despite your belief that you are buying these for the ‘income,’ these positions have the potential to drop 50% or more very rapidly which will lead you to panic sell to protect capital.Reduce weightings in portfolios to protect capital, you have had a great run – now it is time to wait for the next opportunity.”

(Josh Brown confirms my views in an excellent post on the “Myths Of MLP’s” today.)

Valuable Lessons Learned & Relearned

What this background teaches is, as always, “this time is not different.” Investors have once again been taught the folly of performance chasing and the belief that fundamentals will trump human psychology in the short-term.

There is currently a growing belief that oil has reached a bottom in the low 40’s. Of course, that was also the belief a couple of months ago with oil was in the low 50’s. These beliefs currently appear to be based more on “hope” rather than fundamental underpinnings.

There is a basic supply/demand imbalance currently operating within the oil complex. As shown in the chart below, despite the collapse in oil prices and rig counts, supply has steadily grown over the last several months.


As shown above, the last time that supply was this high, it was the peak of oil prices for almost 20-years as the imbalance in supply was resolved. The subsequent surge in oil prices, from extremely suppressed levels of production, supported the push into the “fracking” boom and a massive surge in supply without a subsequent increase in the demand to consume it.


The ending was inevitable and just a function of timing. Importantly, the current surge in supply is once again exceeding a weakness in global demand. Given the current backdrop of the structural shift in employment dynamics and excessive indebtedness, it is unlikely that economic growth will accelerate to a point to markedly increase the demand side of the equation.

This suggests that oil prices may become mired within a lower trading range for many years to come as the reversion process clears the excess supply overhang.

However, from an investment standpoint, both in energy stocks and MLP’s, there is more to this story.

The supply/demand imbalance was resolved by the “fracking boom” as new technologies allowed for the extraction of “shale oil.” The rush for “black gold” enticed a large number of financial institutions to issue debt, with a large chunk of it classified as“high yield,” to industry players. Not surprisingly, many of these same financial institutions are having “night sweats” in the anticipation of defaults in 2016 as currently“hedged” oil prices become “unhedged” as the end of the year approaches.

The problem for marginal industry players is that access to cheap capital has now been cut off, and even larger producers are having a tougher time obtaining capital. If oil prices remain at substantially lower levels in the months ahead, as I currently suspect(not withstanding oversold bounces), there is likely going to be a good bit of turmoil in the energy space next year.


I certainly understand the “temptation” to jump into the beaten down energy space currently, I would recommend only doing so in small amounts and with a very long time horizon measured in years rather than months.

The supply/demand dynamics currently suggest that oil prices and energy-related investments could find a long-term bottom in the months ahead. However, it does not mean those investments will repeat the run witnessed prior to 2008 or 2014. Such is the hope of many investors currently as their “recency bias” tends to overshadow the potential of the underlying fundamental dynamics.

I am suggesting that an argument can be made that oil prices could remain range-bound for an extremely long period of time as witnessed in the 80’s and 90’s. It is here that lessons learned in the past will once again be re-learned with respect to the dangers of commodities, fundamentals, leverage and greed.

For the Houston economy, there is likely more pain to go through before we reach the end of this current cycle. There are still far too many individuals chasing yields in MLP’s and speculating on bottoms in energy-related companies to suggest a true bottom has been reached.

While there will be some fabulous trading opportunities in the energy sector in the short-term, the real opportunity likely lays ahead in 2016, or beyond. Long-term investment opportunities generally align when the supply/demand imbalance is corrected, and a corresponding hatred for energy-related companies abounds.

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