Thursday, October 28, 2010

Energy Equities

"Its an ill wind that doesn't blow SOMEBODY some good..."

Oil prices are back in the danger zone for the American economy, only this time an economic contraction is not as likely (notice I did not say "won't" or "will not"... anything is possible) to collapse Oil prices.  I say this because I believe that the U.S. is no longer the "Axe" in the price of Oil.

Nat Gas is finally finding the handle as it has become apparent to the industry and the market that the players have been overfunded to the point of soiling their own nests.... this is a great lesson in understanding the commodity cycle... over investment leads to overproduction leads to price declines leads to underinvestment leads to underproduction leads to rising prices leads to over investment...

Fron month crude Oil is $82.11 as we speak, but delivery this spring (June) is over $85.  This is murder on the U.S. economy but music to the ears of energy investors.

I like equities better than the commodity at the moment because of the fairly steep contango.  I made a killing in the commodity a few years back, but I made my bet at a time of steep backwardation (please goolge "contango" and "backwardation" for the sake of brevity)... and the market seems to be onto us in a case of "fool me once, shame on you... fool me twice, shame on me..."

My biggest energy equity position is Exxon... earnings just out were up 55% and that's with the price of Nat Gas in the crapper... If, and its a big "IF", Nat Gas can catch a bid Exxon could be a triple digit name.  Not a bad return for taking a AAA+ risk, me thinks.  Keep in mind that I use a multitude of hedges, i.e. covered calls, shorts, paired trades...

Gotta keep your eye on the ball, though.  This is not a recommendation, only my thoughts and observations and I reserve the right to change my mind on a freakin' dime.


bureaucrat said...

"Contango" and "backwardation" are the stupidest terms invented by the oil financial industry. They do not intuitively tell you what they really mean. We need new terms.

Since we are talking commodities, we have to remember the main mantra: the answer to high prices is high prices. High prices whack demand, thereby lowering the prices. Oil, gas, etc. will never go very high for very long, because it so adversely affects the economy, and so demand for those products drops when prices are too high, which brings down the oil price. It is self-regulating. Over the long haul, however, oil prices should continue upward, along with the devaluing dollar.

The oil companies are one-trick ponies. While they do oil great, I doubt they will do much else very well. Oil was a high-profit, high-productivity commodity -- a once-in-a-lifetime thing. These guys just won't be able to make much money with their forays into nat gas, solar and wind. The oil companies are going the way of the horse carriage companies.

bureaucrat said...

(And the oil companies know it. They are spending all their spare capital not on finding new oil, but on buying back their own shares, boosting the share price! Enriching the current shareholders before the bottom falls out. The ratio of overall insiders selling shares versus insiders buying new shares is over 100 to 1.)

westexas said...

Two trends to keep an eye on:

(1) Consumption (C) as a percentage of Production (P) in the oil exporting countries--which went from 26% in 2005 to 29% in 2009, and

(2) Chindia's combined net oil imports as a percentage of global net oil exports--which went from 11% in 2005 to 17% in 2009.

If we assume a very slight production decline in the oil exporting countries (0.5%/year from 2005 to 2015) and if we extrapolate the two trends above, then in 2015, for every three barrels of oil that non-Chindia countries net imported in 2005, they would have to make do with two barrels of oil in 2015.

The US is well on its way to becoming "free" of our dependence on foreign sources of oil, as the US us gradually shut out of the global oil market. And the weak consumption numbers, relative to 2005, in the US are simply evidence of that fact.

Dextred1 said...

West texas,

Great job of breaking it down for us. Thanks!!!

tweell said...

The oil companies did a LOT of surveying years ago. Petrogeology is a well-established field. They know where most of the oil is already. BP has most of the solar patents and owns the majority of the solar panel factories as well. They're happily raking in the government subsidies.