How Are You Thinking Bout The Drop In Oil Prices?

[Uccmal]

When the time is right in the next week or two I will be buying:

 

VDE in the US - Vanguard Energy Index

 

and XEG in Canada - Blackrock Cdn Energy Index

 

I may use Leaps on these.  Shall see.

 

Why don`t you just buy calls or futures on oil when you want to speculate on that to pop? :)

 

A couple of reasons.  The index holds the best,  and biggest oil companies.  Holding it pays a dividend, literally. 

 

The price of oil my not recover quickly enough but the good companies will keep making profits even at lower pricing. 

 

I have no experience whatsoever with commodity futures.  I am not keen on the inevitable loss of money that comes from gaining that experience. 

[grasshopper]

Hey guys,

 

New to the board but been lurking for a few months. Portfolio mostly in financials.

 

I actually made my first real money in MLPs during the last time oil and gas prices tanked.

 

In recent years, alot of MLPs have been floated and many are gonna be crushed with this drop in prices, especially many of the EP ones that are very sensitive to price movements. Since many investors invest in MLPs through an index, this may bring down a bunch of non-EP MLPs that have nothing to do with oil prices -> midstream players

 

MLPs have to pay out their revenues in a pass through structure. Most MLP units are held by the sponsoring company and their insiders to retain control of the asset, the rest is floated to the market to raise capital for the parent.

 

Midstream MLPs generally are pipeline, storage, and other midstream assets that are constructed and operated based on 10,15,20+ year Take or Pay shipping and/or use contracts (basically pay whether capacity used or not. Fee business) Easy to project out and do DCF, especially on smaller MLPs that envelope only a few assets, sometimes just even 1 primary asset.

 

Last time I saw the oil prices crash and drag down MLPs, some midstream MLPs were yielding ridiculous amounts of cash distributions per year (30-50%) Had nothing to do with their contracts, just dragged down in the general crashing energy market.

 

Catalysts basically are the distribution (which must be paid as a pass thru) or basically having the parent company of the MLP buy back the MLP (think EPD family of MLPs from Dan Duncan or Kinder Morgan family of MLPs) Usually happens in a pretty quick timeframe, within a year or so, especially for the obvious screaming bargains. If not bought back by the parents, look for massive insider buying from officers of the parent company or sponsoring company of the MLP.

 

Best places to look are wherever there are huge families of related MLPs that has a parent with significant flexibility to buy them back.

 

Anyways....we're not there yet in the MLP world...but just a place to watch as we see oil prices crash. Food for thought.

 

not currently in any MLP, but watching....

 

[KinAlberta]

MLP's can be problematic can't they?

 

A while back I hoped to add one to my RRSP but found that if they are held in RRSP they are subject to a whopping big withholding tax - something in the order of 1/3 of the dividend.

[compoundinglife]

When the time is right in the next week or two I will be buying:

 

VDE in the US - Vanguard Energy Index

 

and XEG in Canada - Blackrock Cdn Energy Index

 

I may use Leaps on these.  Shall see.

 

Why don`t you just buy calls or futures on oil when you want to speculate on that to pop? :)

 

A couple of reasons.  The index holds the best,  and biggest oil companies.  Holding it pays a dividend, literally. 

 

The price of oil my not recover quickly enough but the good companies will keep making profits even at lower pricing. 

 

I have no experience whatsoever with commodity futures.  I am not keen on the inevitable loss of money that comes from gaining that experience.

 

No futures experience but after learning about them for the CFA exams I would agree. Daily settlement requirements, worrying about margin equity. If you were interested in general exposure it seems like something along the lines of VDE is a simple diversified alternative. May not result in the highest possible return but also will probably increase your chances of not breaking rule #1 or #2.

[kevin4u2]

When the time is right in the next week or two I will be buying:

 

VDE in the US - Vanguard Energy Index

 

and XEG in Canada - Blackrock Cdn Energy Index

 

I may use Leaps on these.  Shall see.

 

Why don`t you just buy calls or futures on oil when you want to speculate on that to pop? :)

 

Why not buy oil stocks if you want to speculate on oil prices? 

[frommi]

When the time is right in the next week or two I will be buying:

 

VDE in the US - Vanguard Energy Index

 

and XEG in Canada - Blackrock Cdn Energy Index

 

I may use Leaps on these.  Shall see.

 

Why don`t you just buy calls or futures on oil when you want to speculate on that to pop? :)

 

Why not buy oil stocks if you want to speculate on oil prices?

 

When oil prices stay where they are for a longer period of time you will probably lose money in oil stocks, because they act like call options on oil. When you then buy call options on these call options you will not make money if oil moves only up a bit, only when it goes back up to above 90$. I don`t know how high implied volatility on oil is, but i suspect its a lot lower than on oil stocks.

 

But that is not my main point. My main point is why speculate? I don`t see this as value investing, because most stocks are now more expensive than 3 month ago at oil prices of 90$. Some o&g stocks are worthless now but still trade at market prices above 0$. And i doubt that oil prices will rebound meaningfull without a big supply contraction first.

[compoundinglife]

Interesting info graphics series from Bloomberg:

 

http://www.bloomberg.com/graphics/2014-america-shakes-off-oil-addiction/

[CorpRaider]

Hey guys,

 

New to the board but been lurking for a few months. Portfolio mostly in financials.

 

I actually made my first real money in MLPs during the last time oil and gas prices tanked.

 

In recent years, alot of MLPs have been floated and many are gonna be crushed with this drop in prices, especially many of the EP ones that are very sensitive to price movements. Since many investors invest in MLPs through an index, this may bring down a bunch of non-EP MLPs that have nothing to do with oil prices -> midstream players

 

MLPs have to pay out their revenues in a pass through structure. Most MLP units are held by the sponsoring company and their insiders to retain control of the asset, the rest is floated to the market to raise capital for the parent.

 

Midstream MLPs generally are pipeline, storage, and other midstream assets that are constructed and operated based on 10,15,20+ year Take or Pay shipping and/or use contracts (basically pay whether capacity used or not. Fee business) Easy to project out and do DCF, especially on smaller MLPs that envelope only a few assets, sometimes just even 1 primary asset.

 

Last time I saw the oil prices crash and drag down MLPs, some midstream MLPs were yielding ridiculous amounts of cash distributions per year (30-50%) Had nothing to do with their contracts, just dragged down in the general crashing energy market.

 

Catalysts basically are the distribution (which must be paid as a pass thru) or basically having the parent company of the MLP buy back the MLP (think EPD family of MLPs from Dan Duncan or Kinder Morgan family of MLPs) Usually happens in a pretty quick timeframe, within a year or so, especially for the obvious screaming bargains. If not bought back by the parents, look for massive insider buying from officers of the parent company or sponsoring company of the MLP.

 

Best places to look are wherever there are huge families of related MLPs that has a parent with significant flexibility to buy them back.

 

Anyways....we're not there yet in the MLP world...but just a place to watch as we see oil prices crash. Food for thought.

 

not currently in any MLP, but watching....

 

I agree with you.  Even better if its one with most of the focus on nat gas.  This and maybe an integrated that picks up a steal or two and MAYBE some distressed debt of some of the smaller E&Ps if you can get comfortable that they can make it through are what I'm thinking.

[beerbaron]

Interesting info graphics series from Bloomberg:

 

http://www.bloomberg.com/graphics/2014-america-shakes-off-oil-addiction/

 

This is hilarious. NOBODY predicted the drop in oil prices a year ago. Yet today, we have charts in Bloomberg saying it's an absolute fact. What changed so much in the following to provoke a 40% drop in price?

• Vehicle fuel efficiency
  
• New generation moving to cities
  
• Wind and solar power generation
  
• Public transport usage
  
• Baby boomers retiring
  

 

It seems to me people are putting up a bunch of shit together to explain the sudden collapse. The only facts are:

• Shale gas has increased supply
  
• China's slowdow has reduced demand
  

 

I don't see how a player that consumes 10% of oil (falling to 9% maybe) and a producer going from 10% to 12% could mark a drop of 40%. It just does not add up.

 

 

[augustabound]

This is hilarious. NOBODY predicted the drop in oil prices a year ago.......

 

........It seems to me people are putting up a bunch of shit together to explain the sudden collapse.

 

How is this different than any other "news" outlet from previous correction or collapses?  ;D

 

[adesigar]

I don't see how a player that consumes 10% of oil (falling to 9% maybe) and a producer going from 10% to 12% could mark a drop of 40%. It just does not add up.

 

Its kind of like the parachutes on a plane story.

 

A plane is low on fuel and could crash and the people are getting in case they need to jump out. There are 100 people on the plane and only 99 parachutes can be found. Whats the value of a parachute? People would pay/do anything to make sure they have a parachute. Now imagine someone runs in and says he/she found 2 more parachutes. Now there are 100 people and 101 parachutes. The value of the parachutes is now minimal.

 

 

[beerbaron]

Its kind of like the parachutes on a plane story.

 

A plane is low on fuel and could crash and the people are getting in case they need to jump out. There are 100 people on the plane and only 99 parachutes can be found. Whats the value of a parachute? People would pay/do anything to make sure they have a parachute. Now imagine someone runs in and says he/she found 2 more parachutes. Now there are 100 people and 101 parachutes. The value of the parachutes is now minimal.

 

Not buying it, the inelasticity is not so tight.

 

BeerBaron

[Uccmal]

This is hilarious. NOBODY predicted the drop in oil prices a year ago.......

 

........It seems to me people are putting up a bunch of shit together to explain the sudden collapse.

 

Yup, I was reading predictions of where oil prices are going to go all week.  The biggest bunch of horse manure I have seen in a while. No one knew oil was going this low.  No one! 

 

And now there are predictions that we will soon see oil at $40, that it will steady at 50, 60, that it will go back up. 

 

Oh, and the primary reason young people weren't buying cars had nothing to do with a paradigm change.  They haven't had jobs, and pay checks to buy vehicles since 2007.  This will all revert as the US economy improves. 

 

I like the parachute analogy. 

[Uccmal]

I think one can safely predict that what came down can go back up, or it may come down some more.

 

One can also safely predict that there is a price below which oil cannot fall.  Zero comes to mind but More likely in the 50-60 range now.  Forward adjusting oil price for inflation on any number of infinite curves since the dawn of oil production should bring us to the 50-60 range. 

[peter1234]

Oil man Pickens said he had seen many of these cycles over his 50 years in the business.

 

He thinks oil will go back up in 12-18 months.

 

Here is the most experienced man in the industry and he does not try to explain it any more. He has just accepted that these cycles occur.

;)

[merkhet]

http://www.wsj.com/articles/tracing-oil-price-plunge-back-to-texas-1418404579?mod=e2fb&mg=id-wsj

 

Another narrative.

[Guest 50centdollars]

http://www.theglobeandmail.com/report-on-business/the-saudi-standoff-oil-rich-nation-takes-on-worlds-high-cost-producers/article22073819/

[sculpin]

In the oil market, you can’t have it both ways

 

By Steven Kopits | December 10, 2014 01:14 PM

 

The media is replete with stories of low oil prices killing the shale revolution.  This is not going to happen, and here’s why: the world remains dependent on US shale oil production growth.

 

We at Princeton Energy estimate that oil demand should grow at around 1.6 million b/d  per year at $80/b, on a Brent basis, with that demand improvement becoming evident from the second half of 2015.

 

Now, where would supply growth come from to meet that demand?

 

It could come from Brazil and Iraq for starters.  Brazil’s offshore program is finally finding its legs, and production has been increasing at a pace of perhaps 200,000 b/d per year. Iraq, assuming it does not implode into civil war, could provide as much with some luck.  And perhaps another 200,000 b/d could come from various other sources, for example, from the US Gulf of Mexico in 2015.  And that’s about it for conventional production growth.

 

As a practical matter, since 2005, about 90% of total supply growth has come from North American unconventionals, including Canadian oil sands and US shale oil and natural gas liquids, with US unconventionals providing about three-quarters of North American supply growth overall.  If this were to fall to zero, then all other sources could provide only, say, an increment of only 600,000 b/d, about 1 million barrels per day short of our projected demand growth.

 

Therefore, if shale growth were to fall to zero, then the global economy would be facing a material shortage of oil by the second half of next year, with high prices the result.

 

More likely, however, low prices will only trim the growth of US unconventionals, reducing the increase to “only” 1 million barrels per day by early 2016, of which US shale growth would represent around 800,000 b/d.  Growth of 800,000 b/d per year is phenomenal, paltry only in comparison to the 1.6 million barrel per day pace seen in the US in the last six months.

 

Thus, the equilibrium needed is not the collapse of US shale oil production, but the deceleration of its growth to about half of recently observed and frankly stratospheric levels.

 

And of course, all this assumes no conventional production is likely to roll off due to low oil prices.  I have argued elsewhere that high oil prices have been sustaining more conventional production than unconventional production, and low oil prices could see conventional production to fall well in excess of one million barrels per day by the end of next year.  But even if we assume that low prices will have no effect on conventional production, the world will still need pretty smart US shale oil production growth.

Of course, the return of Libyan (and possibly Iranian) production will depress prices for a while.  Indeed, Libya has been adding barrels over the last six months at the pace of unconventional growth—no wonder prices have tanked.

 

But this process cannot continue indefinitely.  Even if Libya brought production fully back on line, the effect would be fading by the second half of 2015.  The easing of supply outages affects timing of production, but does not change the fundamentals over the longer term.

 

So you can’t have it both ways.  If low prices crush US unconventionals, then production growth will be inadequate, oil prices will pop right back up.  On the other hand, US unconventional growth could remain strong by any reasonable measure, even if reduced from its recent torrid pace—but then oil prices have to stay high enough to stimulate this production.

 

So let’s not fret too much about the US shale business.  The global economy remains highly dependent on its growth, and that’s not going to change.  Within a few months, the market will provide the prices necessary to support the growth of North American unconventionals.

 

[moustachio]

Interesting info graphics series from Bloomberg:

 

http://www.bloomberg.com/graphics/2014-america-shakes-off-oil-addiction/

 

This is hilarious. NOBODY predicted the drop in oil prices a year ago. Yet today, we have charts in Bloomberg saying it's an absolute fact. What changed so much in the following to provoke a 40% drop in price?

• Vehicle fuel efficiency
  
• New generation moving to cities
  
• Wind and solar power generation
  
• Public transport usage
  
• Baby boomers retiring
  

 

It seems to me people are putting up a bunch of shit together to explain the sudden collapse. The only facts are:

• Shale gas has increased supply
  
• China's slowdow has reduced demand
  

 

I don't see how a player that consumes 10% of oil (falling to 9% maybe) and a producer going from 10% to 12% could mark a drop of 40%. It just does not add up.

 

Its like investing. You predict future earnings and cash flows based on past performance, trends, and analysis. When shale oil supply increases are out gaining demand for oil, something has to give. The trend will continue until the price gets low enough to reverse it. So if we have an extra million barrels of oil being pumped everyday, and can assume supply will continue to increase, you end up with a lot of oil sitting around. Even at $70 oil US oil companies were guiding for increased production. So you have extra supply, forecast for more supply, the market will go down until things balance out. $60 oil seems super cheap, but even at that price a lot of US shale oil drillers will still make production gains. I don't think many companies will shut in production at that price, and even if they do they may run at a loss for a while before they make that kind of decision. It might go down to a silly low price because companies will just keep drilling and won't cap off wells until it does.

 

On the demand side, other than companies buying to increase inventories and companies looking to increase reserves, both at discounted prices, how quickly does demand increase when prices go down? I would think there is a pretty long lag between lower prices and increased demand. I don't suddenly start driving more just because gas is cheaper.

 

I honestly think prices would have been lower before, but ISIS made it look like Iraq's production could go away at any time for quite a while. Now ISIS doesn't look to be a crisis, and US shale production gains march on.

 

IEA article worth reading:

http://www.bloomberg.com/news/2014-12-12/crude-oil-extends-drop-below-60-as-iea-cuts-forecast.html

A few quotes:

The IEA, the Paris-based adviser to 29 nations, boosted projections for supplies outside OPEC in 2015 by 200,000 barrels a day, forecasting output will expand by 1.3 million barrels a day to 57.8 million a day. Production rising faster than demand could strain some nations’ ability to store oil by the middle of next year, it predicted.

 

Low oil prices may slow U.S. shale production, Ian Taylor, chief executive officer of Vitol Group, said in an interview yesterday at the Platts Global Energy Outlook Forum.

 

“You begin to think that maybe not this year, but maybe next year, you will see perhaps less growth in U.S. production if the price stays where it is,” he said.

 

U.S. oil drillers idled the most rigs in almost two years this week. Rigs targeting oil dropped by 29 to 1,546, the lowest level since June and the biggest decline since December 2012, Baker Hughes Inc. (BHI) said on its website today.

 

On the other side China is boosting strategic reserves:

http://www.bloomberg.com/news/2014-12-01/china-winning-in-opec-price-war-as-hoarding-accelerates.html

 

That won't last forever and doesn't take off all the current over supply, so it isn't a justification right now for prices to not go lower.

[ERICOPOLY]

I read that Reagan conspired with the Saudis to push down the price of oil in the 1980s.  This was motivated by the desire to inflict pain on the Soviet Union.

 

So far I'm surprised that I haven't seen at least one conspiracy theorist suggest that this time Obama asked the Saudis to hold production in order to put the screws on Putin.

 

[CorpRaider]

http://www.alphaarchitect.com/blog/2014/12/11/oil-stocks-a-real-time-case-study-in-value-investing/

 

This is pretty close to my shopping list.  Maybe add XOM and looking at CRC;  spun into the abyss.  Also maybe some SE, PNY if they sell off hard.

[krazeenyc]

I read that Reagan conspired with the Saudis to push down the price of oil in the 1980s.  This was motivated by the desire to inflict pain on the Soviet Union.

 

So far I'm surprised that I haven't seen at least one conspiracy theorist suggest that this time Obama asked the Saudis to hold production in order to put the screws on Putin.

 

Ive seen this as a theory in plenty of articles that discuss the Saudi strategy.

 

http://www.forbes.com/sites/melikkaylan/2014/10/17/putin-erdogan-saudi-arabia-the-balance-of-power-is-shifting/

 

http://thinkprogress.org/climate/2014/11/25/3596403/russia-oil-prices-sanctions-140-billion/

 

http://www.chicagotribune.com/news/opinion/commentary/ct-saudi-oil-prices-putin-iran-conspiracy-perspec-1121-jm-20141120-story.html

 

[ERICOPOLY]

I read that Reagan conspired with the Saudis to push down the price of oil in the 1980s.  This was motivated by the desire to inflict pain on the Soviet Union.

 

So far I'm surprised that I haven't seen at least one conspiracy theorist suggest that this time Obama asked the Saudis to hold production in order to put the screws on Putin.

 

Ive seen this as a theory in plenty of articles that discuss the Saudi strategy.

 

http://www.forbes.com/sites/melikkaylan/2014/10/17/putin-erdogan-saudi-arabia-the-balance-of-power-is-shifting/

 

http://thinkprogress.org/climate/2014/11/25/3596403/russia-oil-prices-sanctions-140-billion/

 

http://www.chicagotribune.com/news/opinion/commentary/ct-saudi-oil-prices-putin-iran-conspiracy-perspec-1121-jm-20141120-story.html

 

Ah, thanks.  I like more variety than just the version about trying to kill US high-cost production.

[moustachio]

A good article on break even costs for shale oil:

http://www.bloomberg.com/news/2014-11-20/oil-at-75-means-patches-of-texas-shale-turn-unprofitable.html

 

 

[Uccmal]

I read that Reagan conspired with the Saudis to push down the price of oil in the 1980s.  This was motivated by the desire to inflict pain on the Soviet Union.

 

So far I'm surprised that I haven't seen at least one conspiracy theorist suggest that this time Obama asked the Saudis to hold production in order to put the screws on Putin.

 

My guess is that no one really cares about Putin or Russia in any important sense... excepting perhaps those living in Eastern Ukraine, who aren't Russian.