You Ain't Seen Nothing Yet

More bad news for OPEC... Why oil could soar to incredible new highs... You ain't seen nothing yet... China and India will lead the world... Don't worry about electric cars... Reserve your spot for tomorrow night...

OPEC's agreement could be faltering...

As regular Digest readers know, the Organization of the Petroleum Exporting Countries ("OPEC") – along with 10 other nations – agreed last fall to cut total oil production by 1.8 million barrels per day ("bpd").

Thanks to much larger than promised cuts by Saudi Arabia – OPEC's largest producer – the group did eventually meet this goal this spring. And it agreed to extend these cuts for another nine months in May. But there are signs the group's commitment to the deal could be wavering...

This morning, OPEC reported its total output rose 1% last month to more than 32.1 million bpd. As expected, some of this increase was due to rising production in Libya and Nigeria, which are exempt from the deal. However, it also admitted that Iraq raised production, too.

Why is this important? Because Iraq is the second-largest OPEC producer behind Saudi Arabia... and therefore agreed to the second-largest cuts.

According to the terms of the deal, Iraq agreed to cut production by more than 200,000 bpd to about 4.35 million bpd.

But last month, Iraq increased its output by more than 44,000 bpd to more than 4.4 million bpd. And if OPEC's second-most-influential member is no longer honoring the deal, it may not be long until others follow.

If the deal falls through, oil prices could be headed much lower in the near term.

Yesterday, our resident resource expert Flavious Smith explained why he remains cautious on oil prices...

In short, he believes rising U.S. production will keep a lid on prices... and any OPEC troubles would only exacerbate the situation. Meanwhile, many heavily indebted firms are losing money on every barrel they produce. He believes we'll see another huge wave of bankruptcies before this bear market finally ends.

But he also noted that he's incredibly bullish on oil over the longer term. And today, he'll explain why. Here's more from Flavious...

Why oil could soar to incredible new highs...

On Monday, I (Flavious) told you why I think oil prices still have a little more "work" to do on the downside. But I also told you that I believe they're a lock to shoot hundreds of percent higher in the coming years.

The reason – as my subscribers know – is simple: Oil demand is going to absolutely soar over the next several years.

Today, the U.S. remains the world's largest consumer of oil. We use nearly 20 million bpd. This is nearly double the next largest consumer, and more than four times as much as any other nation on the planet. This shouldn't be a surprise to anyone...

But if you read last weekend's Digest Masters Series, you know that the second- and third-largest consumers are no longer "developed" nations as they were for most of the past century... Those titles now go to China and India. As you can see in the following chart, these two countries account for most of the demand growth we've seen in the last decade or so...

You ain't seen nothing yet...

Despite this impressive growth, it's just a tiny fraction of what we could see in the next 20 years.

As my colleague Steve Sjuggerud has been telling you, China is in the middle of a huge industrial and technological revolution. Hundreds of millions of people are moving out of poverty and into the middle class. These folks are driving cars and scooters, watching TV, using appliances, and doing lots of other things you and I take for granted... And these things require huge amounts of energy.

Chinese consumption has nearly tripled over the last 20 years, but there's still plenty of room to grow, as the country's 1.4 billion people grow wealthier.

India has even more room for growth... Its 1.3 billion people use just one-third of the oil used in China. It's like China was 15 or 20 years ago. And I expect to see consumption soar as it begins to modernize.

Now, I've already heard from some concerned subscribers...

They've asked if electric vehicles could put a damper on this trend. After all, if folks are driving electric cars rather than gasoline- or diesel-powered vehicles, they're not going to need as much oil. But these worries are misplaced.

Yes, the internal combustion engine is dirty. But it's simple. It's reliable. It's able to haul great loads. It can carry people long distances. It's cheap to build and cheap to fix. There is already infrastructure across the globe.

And it has proven upgradable. Advances in internal combustion technologies will prolong its useful life. It has been used successfully for 100 years. There are more than 1.2 billion gasoline-powered light-duty vehicles in daily use around the globe.

On the other hand, to believe China and India will adopt electric vehicles on a large scale requires a lot of complicated assumptions...

We must assume the invention of a long-lasting, reliable, and affordable battery. We must assume that electricity will be readily available. We must assume widespread charging station infrastructure will be built across the world. We must assume that these vehicles will be able to haul a reasonable payload, like a trailer or recreational vehicle. We must assume they will be cheap and easy to work on. And if we assume all of these things, we must then assume that a large portion of the 1.2 billion gasoline-powered cars will be replaced by electric cars.

That's a lot of assumptions that we can't reasonably make today... Using "Occam's razor," the simplest and most likely answer is that gasoline will continue to dominate as the fuel for transportation around the world for some time.

If we believe that is the correct answer, then we must also believe that many of the 3 billion people in China and India – not to mention the rest of the emerging world – will be driving gasoline- and diesel-powered cars for the foreseeable future. And this will push oil demand off the charts.

So what kind of growth are we talking about?

Consider this: Today, the U.S. uses about 19 barrels of oil per person per year. If demand in China and India rises to even five barrels of oil per person per year – about one-quarter of what we use today – global consumption would rise by nearly 10 billion barrels per year.

That's an increase of nearly 30% over today's levels... and that's a conservative estimate over the next 10 to 20 years. Even with rising shale oil production, this kind of demand growth will dwarf global supply... and send prices soaring.

Tomorrow, I'll explain why I believe American producers are ideally positioned to lead the next oil boom. I hope you'll tune in. And don't forget to reserve your spot for tomorrow night's free webinar, where Porter and I will share more about our long-term outlook... including how you can set yourself up to make a fortune in the coming boom. Reserve your spot here.

New 52-week highs (as of 6/12/17): iShares Select Dividend Fund (DVY), Johnson & Johnson (JNJ), 3M (MMM), Annaly Capital Management (NLY), Travelers (TRV), and Invesco High Income Trust II (VLT).

In today's mailbag, more feedback on the "Escher Economy"... and a subscriber disagrees with us about "Peak Oil." As always, send your questions and comments to feedback@stansberryresearch.com. We can't respond to every email, but we read them all.

"I love your description of the current economics using Escher! He is one of my favorite artists. Also, I want to mention that I took your advice in 2011 to purchase Altria – 400 shares in April for about $26/share, then added 400 more in August that year. I spent about $20,000 for 800 shares, and now have over 1,000 shares worth about $75,000! What a HOMERUN, thank you!" – Paid-up subscriber Jack S.

"Hi Porter, just wanted to tell you I was working in LA in the early '70s and was fortunate to see an almost complete original M.C. Escher exhibit at USC. Fantastic. Your analogies are right on." – Paid-up Stansberry Alliance member Michael G.

"Interesting and as usual Stansberry is implying extreme danger ahead. You are very good at scaring me. I hate you (not really). But I don't love you either. I find it very difficult to make investment decisions based on the alternating fear and greed motivation techniques you employ. I'm sure this article will be followed up with a hot new investment advisory and include a must act deadline.

"The questions your article brought to my mind are: Will global central bank participation in the equity markets be destabilizing? Because when will they sell if ever? And when will they stop buying if ever? Do you consider central bank money a form of hot money? Are you recommending switching out of cap based mutuals/ETF's and into equal weight? Or should one steer clear of indexing all together and buy individual equities? Just asking. Thank you." – Paid-up subscriber Brian C.

Porter comment: Brian, I didn't write that essay to scare anyone. Nor did I write my now-famous documentary "The End of America" to scare people. I write the essays and narratives because I'm very concerned about what these policies (paper money, huge debts, etc.) will do to our country, to my subscribers, and to my friends and family.

These aren't predictions per se, but possibilities that must be discounted and considered as you consider your financial plan.

If you want to see how we discount them, then look at our model portfolios. For about $100 a year, you can see the model portfolio in my Investment Advisory newsletter, which is normally between 75%-100% long. Right now, we have about half a dozen short positions in an equal-weighted portfolio of about 30 positions. So we're roughly 80% long.

Does that sound like I'm planning for Armageddon?

Likewise, in our Portfolio Solutions product, The Total Portfolio, which I manage, is about 90% long.

So while I consider the risks we face constantly and do my best to make sure we're hedged against those risks, I'm far from a "doom and gloomer." In fact, if you look at my long-term track record, I've probably recommended more big, new technology investments than any other newsletter writer in the world. Here's a partial list of the companies I've brought to our readers' attention over the last 20 years:

• Amazon (first recommended at $3, now trading for almost $1,000)
• Celera Genomics (before its big run in 2000)
• JDS Uniphase (before its big run in 2000)
• Qualcomm (before its big run in 2000)
• Abgenix (cancer immunotherapy, early 2000s, when no one thought it was possible)
• Regeneron (under $20, now trading for almost $500)
• ID Biomedical ($2, bought out at $35)
• Intuitive Surgical ($35, now trading for almost $1,000)
• Illumina (under $20, now trading for almost $175)
• Shopify ($25, now trading for more than $85)
• Nvidia ($100 a share, now trading for nearly $150)

And that's just off the top of my head. There are dozens more.

These are the companies that have brought us cheap, unlimited bandwidth and wireless bandwidth, a retail revolution, genomic sequencing, immunotherapy in cancer treatments, robotic surgery, huge breakthroughs in semiconductor data processing, etc.

And listen, I don't want to claim profits that didn't materialize. We've printed our track record surrounding these recommendations. We didn't make money on all of them. We stopped out sometimes long before we should have.

But... I can't imagine how anyone could parse my work from anytime during my career and walk away believing I'm bearish.

I'm the opposite. We're living in the greatest period of wealth creation in history. The increases in productivity in dozens of critical industries – information processing chief among them – has never been more obvious.

I've ridiculed analysts like Chris Martenson ("Peak Prosperity"... formerly "Peak Oil") who preach nothing but fear and collapse. (And I think people like him are either insane or criminally duplicitous. Nobody can be that stupid... or that consistently wrong... without trying.)

Even when I was at "maximum bearish" – in May/June/July 2008, when I predicted the financial crisis and told our subscribers to sell every financial stock they held – we didn't sell every stock in our portfolio. Luckily, I was dead wrong about the outcome of the financial crisis. The U.S. dollar didn't collapse. (At least, not yet.)

Anyway... I hope you'll understand that I'm always studying all of the facts as I find them and trying to connect the dots together to both earn our subscribers profits... and protect them from risks.

I call it how I see it. And I hope you'd do the same if our roles were reversed.

"I really appreciate the work done at Stansberry Research. I am a systems thinker, scientist, and systems analyst, designer and engineer. FYI. Peak oil was never about 'running out of oil.' It was about sources of supply becoming more and more expensive to exploit and environmentally damaging to extract. That part is NO myth. Fracking has enabled extraction of massive amounts of oil and gas, but the damage it does to the environment, to people's health, to local economies, and every other human value is massive. If you actually think it's a benign process you need to dig a little deeper.

"Also, the development of fracking has much more to do with extraction of oil and gas for international export than American energy independence and it is being done in a way that creates a toxic wasteland permanently trashing any place it is allowed. So... profit for the very few at the permanent expense of everyone else." – Paid-up subscriber Jon S.

Porter comment: Jon, I beg your pardon, but I've read the original Hubbert texts. He was most certainly talking about running out of oil. Hubbert's Peak was defined as the point at which production had to begin to decline because more than half of the oil in the reservoir had been produced.

Nothing was said about running out of so-called cheap oil until about 2011, when the increases to production became impossible to deny. What do you call a scientist who changes his hypothesis to explain the data? I have some ideas...

P.S. This statement is patently false: "The development of fracking has much more to do with extraction of oil and gas for international export than American energy independence and it is being done in a way that creates a toxic wasteland permanently trashing any place it is allowed."

By patently false, I mean in direct and total contradiction to all of the known facts. When modern fracking techniques were first pared with vast improvements to horizontal drilling (1999-2008), there was virtually zero export market for U.S. gas, and exporting crude was outlawed.

And if you think drilling and fracking destroys the environment... I guess you've never seen a drill site.

Regards,

Justin Brill
Baltimore, Maryland
June 13, 2017